Aerodrone Case Case Study Help
Introduction
AirMasters, a leading technology company in the field of aerial innovation, has been diligently working on the development of a groundbreaking project known as the "Aerodrone" over the past three years. The Aerodrone is intended as a solar-powered drone, specially designed for aerial photography, catering to the needs of small businesses and amateur enthusiasts.
It promises extended flight times due to its innovative solar cell technology, making it a potentially attractive solution for those seeking versatile and sustainable aerial imaging capabilities. In this report, we aim to comprehensively evaluate the viability of the Aerodrone project before any further commitments of resources or funding are made.
Problem Statement
AirMasters, a leading technology company, is currently facing a critical decision regarding the viability of its Aerodrone project. The company has invested £550,000 over the past three years in the development of the Aerodrone, as the project nears completion, several factors raise concerns about its economic feasibility.
Situational Analysis
| DCF Analysis | ||||||
| Year | 0 | 01 | 02 | 03 | 04 | 05 |
| “R&D”(Capex) | -150 | -150 | ||||
| Manufacturing Machinery Cost | -650 | |||||
| Testing Equipment Cost | -100 | |||||
| Sales Revenue | 900 | 1080 | 1215 | 1440 | 1350 | |
| Variable Costs | -370 | -444 | -499.5 | -592 | -555 | |
| Fixed Overheads | -380 | -380 | -380 | -380 | -380 | |
| FCF | -900 | 0 | 256 | 335.5 | 468 | 415 |
| Discount Rate | 12% | |||||
| PV | -900 | 0 | 204.082 | 238.802 | 297.422 | 235.482 |
| NPV | 75.7885 | |||||
| IRR | 2% | |||||
| Required IRR | 20% | |||||
| ARR | Average Profit/Average Investment | |||||
| Average Profit | 294.9 | |||||
| Average Investment | 180 | |||||
| ARR | 1.64 | |||||
| Payback Period | ||||||
| Cumulative cash flow | -900 | -644 | -308.5 | 159.5 | 574.5 | |
| 0.65919 | ||||||
| Payback Period | 3.66 | Years | ||||
NPV (Net Present Value)
In the calculations, the NPV is positive at $75.79, which specifies that the task is estimated to produce value and is potentially a good investment.
IRR
IRR is the markdown rate that makes the NPV of a project nil. The IRR in this case is 2%, which is less than the required rate of return (20%). This suggests that the project may not meet the desired profitability threshold.
ARR
“ARR” is the proportion of normal accounting return to the average savings. The ARR is calculated as 1.64, which means that for every unit of currency invested, there is a return of 1.64 units. However, ARR does not reflect the TVM and its interpretation may be limited.
“Payback Period”
The “payback period” is the phase it proceeds to recover the initial investment of the project. The cumulative cash flow becomes positive in the third year, and by the end of the third year, the initial investment is recovered. The payback period is approximately 3.66 years.
Explanation
- The positive NPV suggests that the project is expected to generate value and is theoretically a good investment.
- The required rate of return (20%) is higher than the calculated IRR which indicates that the project may not be attractive enough given the expected return.
- ARR provides an accounting-based measure of return, but it does not consider the TVM.
- The payback time of 3.66 years indicates that the initial investment is recovered within this timeframe. The payback is also good to recover the initial cost.
According to these results, the NPV and payback period suggest the project is viable, the IRR and ARR results indicate some risk regarding this project.
Recommendations
Based on the comprehensive financial analysis and interpretation of the Aerodrone project's financial metrics, the following recommendations are presented to guide AirMasters in making an informed decision regarding the project's future.
Market Research
Reassess market conditions and customer demands. Ensure that sales projections are aligned with current market trends (Hauge, 2004). Consider conducting additional market research to identify emerging opportunities or potential threats.
Discount Rate Evaluation
Reevaluate the chosen discount rate. The discount rate significantly influences NPV and IRR calculations. Ensure that the rate accurately reflects the project's risk and opportunity cost (Bonneux, 2001).
Diversification
Consider diversifying the product or service offerings. This can spread risk and potentially open up new revenue streams, contributing to a more robust and resilient project.
Operational Efficiency
Focus on improving operational efficiency to reduce variable costs. Implement lean practices, streamline processes, and explore technology solutions that can enhance productivity.
Stakeholder Engagement
Engage with key stakeholders, including customers, suppliers, and internal teams, to gather insights and feedback. Their perspectives can provide valuable information for refining the project strategy (Noland, 2010).
Long-Term Planning
Develop a long-term strategic plan for the project. Consider how market dynamics may evolve and plan accordingly to ensure sustained success beyond the initial years.........
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