Finance question (NPV etc)

[jw01]

doing some courses and trying to figure out what is the best analysis to use for a 3 year plan?

in the case, we manufacture a product and a third party wants to offer us 1M to buy the plant from us. they want to then sell us the product at a cost of approx 200K a year.

influx of cash from 1M from selling property

how would you approach ....600K over the next 3 years

-would you do NPV ie. 1M in influx with 200K from buying from third party...cost benefit
-access...should we go ahead with this...i.e. sell plant or what?

-what approach to use....NPV or profitability or what? what type of analysis

 

[K Douglas]

Basically what you need to know how much it costs to manufacture the product to do a cost benefit analysis. And yes NPV calculations would be used in the analysis.

 

[iamasian]

I think what you're really looking for is a profitability analysis. NPV looks at what something is worth right now, like a project that will payoff $200k per year over 5 years, you'd want to find how much you're willing to pay and at what rate of return for that.

What you'd like to is if the company would still make money. If they're willing to sell you the product for $200k per year and you can sell that product for $500k, you have a gross profit of $300k. Simple as that I think.

 

[TeasePlease]

Variation of the classic make or buy.

You need to do a NPV for each scenario (keep factory and make, or sell factory and buy).

 

[legmann]

Should consider IRR also.

 

[TeasePlease]

Should consider IRR also.

Why?

 

[spraggamuffin]

You can use Net Present Values and you can then determine the Internal Rate of Return from this if necessary.

http://www.investopedia.com/ask/answers/05/npv-irr.asp

 

[TeasePlease]

Why would you be concerned with IRR? IRR deals with return on some invested capital. The cost of the plant is sunk. It's irrelevant. It's the net cash return under alternative scenarios going forward you care about.

 

[IM469]

doing some courses and trying to figure out what is the best analysis to use for a 3 year plan?

in the case, we manufacture a product and a third party wants to offer us 1M to buy the plant from us. they want to then sell us the product at a cost of approx 200K a year.

influx of cash from 1M from selling property

how would you approach ....600K over the next 3 years

-would you do NPV ie. 1M in influx with 200K from buying from third party...cost benefit
-access...should we go ahead with this...i.e. sell plant or what?

-what approach to use....NPV or profitability or what? what type of analysis

Wow, I thought going to terb for legal advice was crazy !

I thought this might be someone cheating on their homework but there are too many unknown factors for it to have a real solution. How did you determine the $1 million selling price for your plant ? Did you appraise the land, building and contents ? What $ 200k product to purchase over 3 years ? Your demand picks up for your product how does that affect the $200k ? What happens after 3 years ?

 

[legmann]

Why would you be concerned with IRR? IRR deals with return on some invested capital. The cost of the plant is sunk. It's irrelevant. It's the net cash return under alternative scenarios going forward you care about.

Isn't the whole point of determining IRR to allow for one investment scenario to be compared against another? NPV is relevant only to the particular project for which it is determined; it won't help you compare one alternative against another.

 

[TeasePlease]

Isn't the whole point of determining IRR to allow for one investment scenario to be compared against another? NPV is relevant only to the particular project for which it is determined; it won't help you compare one alternative against another.

NPv by itself isn't particularly meaningful (other positive vs. negative). Same goes for IRR as a standalone figure. It's comparing the NPv or irr of two or more options that is helpful in this scenario.

IRR is of limited use because it compares rates of the return, which isn't relevant in this case because of the sunk capital cost of the "make" scenario and because it is not clear that there is a return (no revenue; cost saved?)