Potential Investment Project : Indian River 's Management Team

800 Words Apr 19th, 2016 4 Pages
Potential Investment Project 3 The third investment that Indian River’s management team asked Constand Consulting to analyze and discuss involves choosing between two different projects, W and C, which are systems of disposing of wastes associated with another product, frozen grape juice. Both systems have an estimated three-year useful life; the project selected will probably be repeated at the end of its life into the foreseeable future. Since the waste disposal projects have no impact on revenues, Indian River’s management team has asked that the relevant cost of the two systems be analyzed. Attachment 10 (page XXX) shows the expected net costs and other supporting information for the two projects. Project W requires more workers but less capital. Project C requires more capital, but fewer workers. The projects are considered to be average risk; a 10.0% cost of capital is used. On a NPV basis, Project W is marginally cheaper. Project W has a NPV of -$6,974; Project C has a NPV of -$6,984. If, Project W is judged to be riskier than the average project, say, because future labor costs are difficult to forecast, then a higher WACC value must be used. However, because both projects are not using the same WACC value (and cash flows are negative), then it should be stated that the NPV numbers may be inherently incorrect (or at least not comparable). Intuitively, however, Project C would be the better investment because of its lower risk when compared to Project W.…

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