ANALYSIS:
As suggested by Candice, we were required to analyze the proposal of acquisition of the Wolf TraxCompany by doing the complete analysis of the project through different decision making tools and methods. As also required in the case analysis, we calculated the estimated cash flows of the proposal for a 10 year period. We used the suggestions and estimations of Candice to arrive at the requirement. In the calculations of the baseline project estimations and projected a positive cash flows throughout the 10 year of project estimation life, which was quite feasible, subject to, risk of diversion in the estimation process. Since, the cash flows were highly favorable, the NPV was also positive that was $3237. 26.
To arrive at the net present value, firstly we have to assume the suitable cost of capital. For that purpose, we used Capital Asset Pricing Model (CAPM) approach and arrived at a suitable discount rate of 8% (rounded up). Candice has requested for the Sensitivity Analysis of different important inputs to the project. For this purpose, we have calculated the sensitivity of the net sales, gross profit, capital expenditure, net profit after tax and net cash flows.After that, on the assumption of scenario analysis, we assumed the + - 25% of the revenues as the best and worst scenarios.
RECOMMENDATION:
After the careful analysis and evaluation of the proposed project of potential acquisition of the Wolf Trax Incorporation, we must recommend that the Compass Minerals should go for the acquisition of the Wolf Trax Incorporation as they will befinancially in a good position, not just in the baseline scenario, but also in the best and worst scenarios as the company will be generating enough cash flows to cover its investment in the project. In case of the sensitivity analysis, the most sensitive input in the project was the sensitivity towards Capital Expenditure as it was around 75% sensitive towards the project. Which means if the project’s investment cost is increased by 75%, the project will not generate any excess cash flows, and if it goes more than 75%, the project will not remain feasible.................................
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