Two Options Available for Claires Antiques - Assignment Example

It should be noted that as the company currently has a level limited of resources, only one of these alternatives will be chosen. To aid in the decision making, this presentation will utilize a Net Present Value (NPV) analysis to the projected cash flows of both projects. Considering that the cost of capital may vary from Claire’s antique expectations, we will also employ sensitivity analysis to look at the value of the two alternatives’ NPVs in the different cost of capital. The presentation will first lay out its assumptions before proceeding with the evaluation of the given alternatives.

It will conclude with its findings and recommendations. Assumptions The computations will generally use the data from the research conducted by the private firm. Table 1 shows the data gathered from the research. We will further assume that the risk-based cost of capital is 10% and that the project has a tax rate is 40%. Also, the company will be using a straight-line depreciation method to adjust the book value of the facility. Another assumption is that the company will be using either North or West Warehouse for five years, after which the facility will be sold in cash in its book value or salvage value.

Also, this presentation assumes the depreciation expense is not yet included in the presumed annual fixed costs. Evaluation of Option 1: North Warehouse NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV is the difference between the present value of cash inflows and the present value of cash outflows (Net Present Value 2006). If the NPV is positive, the investment is accepted. In contrast, negative NPV means that a project is not profitable. The evaluation of the alternatives begins with the laying out of the expected cash flows.

In an NPV analysis, cash outflows and inflows are further discounted to take into account the time value of money. After that, the NPVs of the two options are compared.