Financial feasibility analysis for launching Christmas Star: A product by Noel Plc - Essay Example

Download file to see previous pages Their products are marketed to a wide spectrum of National and Multinational Oil service companies based in the UK and the North Sea periphery states. The company is planning to introduce a new advanced underwater camera - the 'Christmas Star. The company has identified a market segment for this product. They feel that there is scope for new entrant for the product as the market segment is presently poorly served.
They anticipate a market life of "Christmas Star" to be 5 years. The marketing director opines that this product will be attractive to the existing customer machinery base and also will generate new business in a highly competitive market place. I will make a financial appraisal of the capital investment for the project.
The objective of Investment Decision Making is to maximize shareholders Wealth that generally translated to mean maximizing the current worth of the company's share. Hence we will first work out the estimated growth in the current worth of the company by the proposed introduction of the new product and we also will talk about other consideration for support or opposition of the proposal.
1. Net Present Value: It is a discounted cash flow method of investment appraisal. It uses the method of discounting future cash flows to its present values. The sum of the future cash flows less the initial investment gives the Net Present value of a Project.
Advantages: Its main strength is its recognition of time value of money because it is based on discounted cash flows, recognizing the fall in value of currency.
As it considers cash flow for calculation, it is not affected by the accounting policy of a particular company. The Accounting policy of a company influences the Net Profit calculation.
As it takes account of the costs of raising finance, a positive NPV reflects the increase in shareholders' wealth, which is supposed to be the main consideration of Project appraisal.
Disadvantages: This is a bit cumbersome process of calculating the discount rate with the nature of finance available. The cost of finance may be different for different kinds of fund invested. For instance the cost finance funded by debt will be different from the cost fund financed by equity.
It gives result in absolute figures, and does not allow for the size of the project.
2. Internal Rate of Return: Internal Rate of Return is the discount rate that gives a zero NPV. The acceptance criteria of this method of appraisal are; IRR should be greater than the discount rate ...Download file to see next pagesRead More