Alla Aeroshoes is planning to market and sell its new Bluetooth-enabled shoe in

Question

Alla Aeroshoes is planning to market and sell its new Bluetooth-enabled shoe in two markets: nationaland international. The local market will require an initial investment and will have cash inflows for threeyears. If things work out, they will invest in an expansion and sell internationally, expecting benefits forfour years. Assume a MARR of 10% and a risk-free interest rate of 5 %. Consultants suggest that thevolatility of the cash flows is between 35% and 50%.   Discuss their expansion strategy.
Year $0 Invest $60 Million
1 $20 Million2 $22 Million3 $24 Million4 Invest $160 Million5 $60 million6 $85 Million7 $100 Million8 $120 Million

Explanation / Answer

From above volatility impact on the NPV( the Net Present value of cash flows), the NPV remains positive therefore the above project is adding a net wealth whatever be the volatility of the cash flows. Thus the expansion strategy is profitable.

(figures in $millions) MARR( r) 10.00% CF=Cash Flow CF=Cash Flow Present value Year(t) CF(A) (=CF(A)/(1+r)^t 0 -60 -60.0000 1 20 18.1818 2 22 18.1818 3 24 18.0316 4 -160 -109.2822 5 60 37.2553 6 85 47.9803 7 100 51.3158 8 120 55.9809 NPV A=sum of above PVs 77.65

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