Competitive Advantage, Case Study Example

Project A: 21000/21000=1

Project B: 23666/16000=1.48

Project C: 35999/17000=2.12

Project D: 33332/15000=2.22

Project A: 10000-(10000*.4)/(10000/2)=1.2

Project B: 18334-(18334*.4)/(10000/2)=2.2

Project C: 25000-(25000*.4)/(10000/2)=3.0

Project D: 21668-(21668*.4)/(10000/)=2.6

Project A: 0%

Project B: 52%

Project C: 50%

Project D: 78%

(Calculations done in attached Excel sheet)

10% discount rate

Project A: $-826.45

Project B: $5372.43

Project C: $9040.06

Project D: $8084.11

35% discount rate

Project A: $-1920.44

Project B: $1348.35

Project C: $1864.25

Project D: $3161.52

(Calculations done in attached Excel sheet)

The rankings differ because each system places different levels of importance on each variable. For example, Project A looks good on the basis of Payback Period because it quickly regains the initial investment. However, the project never becomes profitable and when time value of money is factored in, it looks even worse.

Payback period doesn’t measure profitability or take TVOM into consideration, so it is not very helpful. ROI does measure profitability, but does not take TVOM into consideration. Both Internal Rate of Return and Net Present Value use each factor, making them quality measurements for these cases. Net present value and internal rate of return struggle with projects of different sizes, but since they all require up front investments of the same amount, this is not a significant issue here.

If any project can be undertaken, then Projects B, C, and D should be done assuming the companies WACC is not around 50%. Project A would only make sense if deflation was expected, which is exceedingly rare. If they are mutually exclusive, then it would depend on what kind of discount rate makes the most sense for the company. The ten percent discount rate has Project C as the most beneficial, while 35% discount rate names project D.