AutoEdge Company: Net Present Value - Essay Example

Analysis
Negative NPV means that the project is unable to return the amount of money invested. This is not healthy for the company and the project should be terminated (Academic Resource center, 2010).

The company is in a bad financial state and should consider changing its line of operations. Maintaining the same business operations may not be a suitable thing to do in the long run. Relocating to the United States may also not be the most convenient way to tackle this issue. This is primarily because, the state of the American market is on the brink of collapse, and therefore, consumer expenditure is very low. The American economy is in recession, investing in a market that is dwindling is not a good idea. High levels of unemployment and low wages will result in people opting for public transport rather than purchasing automobiles. This may not be good for the firm. Since the South Korean markets are stable it would be plausible to expand on the Korean soils and any other stable markets across the globe (Swami, 2013).

Another vital measure that the company needs to consider is to ensure that the NPV is positive. The firm may decide to abandon the projects that result in negative net present value and invest in other areas that may lead to better returns. If the company is unwilling or unable to change from one line of business to another, then it may change the structure and operations involved in the production of the existing product. The firm should upgrade its technology and equipment to improve and increase productivity. The company should also invest thoroughly in advertisement to win back consumer confidence and also to create an awareness of the possible changes that the company has instilled in its products (KPMG INTERNATIONAL, 2013).

The company could also organize workshops for automobiles. This is the best way to bring the products to the consumers while at the same time convincing them to purchase the automobiles. This has the advantage of reducing the biases that the consumers may be having towards the company’s products. The automobiles should then be fitted with quality parts, like durable engines and stereo systems. The company should also participate in community development projects, the creation of jobs, and other activities that will result in trust among the locals. The product should give them a sense of pride, that is, the people should feel that the product is their own and not a foreign company trying to exploit them. These activities will automatically change the perception of the people of the company.

YEAR 2012 2013 2014 2015 2016 2017 2018
Cost of Capital (US$ in Millions) 6% 6% 7% 8% 8% 7%
Revenue $30.10 $34.20 $38.10 $40.40 $45.60 $50.00
Selling, General, Admin $16.10 $17.20 $18.90 $19.50 $21.40 $24.30
Depreciation $4.10 $4.40 $4.80 $4.90 $5.30 $5.70
Interest Expense $0.45 $0.56 $0.69 $0.73 $0.78 $0.81
Taxes $1.10 $1.30 $1.70 $1.90 $2.00 $2.10

Net Income $8.35 $10.74 $12.01 $13.37 $16.12 $17.09
Increase in fixed assets $1.30 $2.40 $0.90 $0.00 $4.90 $2.10

Initial capital expenditure $18.00
Operating Cashflow $4.25 $6.34 $7.21 $8.47 $10.82 $11.39
Cost of Capital $19.08 $20.23 $21.65 $23.38 $25.25 $27.02
Free Cashflow ($14.83) ($13.89) ($14.44) ($14.91) ($14.43) ($15.63)

Pvif factor 0.943 0.89 0.816 0.735 0.681 0.666
PV Cashflow ($17.39)
Value of future flows ($759.17)
Initial expenditure $18 $20.38 $22.63 $22.55 $23.38 $30.15 $29.12

Net Present Value Initial: PV=-$18
Year 1: PV= -$7.633
Year 2: PV= -$3.89
Year 3: PV= -$2.411
Year 4: PV= -$1.645
Year 5:PV= -$1.075
Year 6: PV= -$0.731
NPV ($35.39)