Valuation of AirThread Connections Assignment Example | Topics and Well Written Essays - 500 words

Valuation of AirThread Connections - Assignment Example The biggest assumption which is taken for this scenario is the steady as well as lower cost pattern especially in terms of recurring cost of people and supervisor which is estimated to be $20,000 per year for the next years. On the other hand, the estimated benefits of to be derived from this project in next five years are also another contributing factor in arriving such huge NPV such that increased profits amounts to around $160,000 per year over the next five years. In this way, this project would successfully achieve the positive NPV of $257,065. The second scenario is referred to as the neutral strategy such that in this particular scenario, the final figure of NPV would be zero as the cost of capital of the project (discount rate) would be exactly equal to the Internal Rate of Return (IRR). The other assumptions of this strategy are the same however there are few changes as well. The major change in the assumptions of this scenario is that the software cost of the project has been reduced from $175,000 to around $118,128. The other major changes include the increase in the recurring cost of people and supervisor which has been increased from $20,000 to $50,000 and $40,000 in first and second year respectively and kept constant at $30,000 each year for the next three years of the project. The other major change is the decrease in the amount of profits such that profits are assumed to be reduced from $160,000 to $40,000 and $60,000 in first and second year respectively whereas it is kept constant at $80,000 per year for the rest of the project life. In this way, the cash outflows are exactly equal to the project cash inflows, thereby generating nil NPV for the project which indicates a breakeven position of the project. The defensive strategy is developed to highlight the negative consequences and effects of cash flows upon the project. All the assumptions