Finance Assignment Harvard Case Solution & Analysis

Investment Opportunities

Solution A

The company has three available investment opportunities. Every investment is generating positive net present value and the useful life of each investment is 10 years. However, the initial investment required for each project is different such as 5.5 million dollars for project A,$3 million for project B and $2 million dollars for project C.It is expected that the net present value of each project is calculated by using the rate of 15% as a cost of capital. It is also expected that each project is independent of one another, which means investing in any one of the project and rejection of the other projects will not affect the decision.

Project C is generating maximum net present value, therefore on the basis of net present value project C is seems to be most suitable investment option. However, the initial investment required for project C is also high among the others; therefore the decision could not be taken solely on net present value basis.

In order to make true and fair comparison profitability index of each project is determined by dividing the net present value of each investment with its initial investment. Project B and C are generating same amount of profitability index how ever, project C requires less amount of initial investment and its internal rate of return is also high, which is 40 % as compared to the project B in which the internal rate of return is 30 %.Therefore, on the basis of initial investment, profitability index and IRR, project C is a suitable option to be undertaken.

Solution B

It is expected that the available investment options are mutually exclusive to each other.There are three projects A, B and C and if these are mutually exclusive to each other,then none of the project could be taken independently.

 It is assumed that one project is mutually exclusive to the other projects, which indicates that any of the projects could not be taken independently and only two projects will be taken at the same time.Therefore, the possible options in this scenario are AB, AC and BC.

Option AB, and AC are generating same amount of profitability index and requiring more investment as compared to the option BC in which the profitability index is greater than the other two options and it also requires less amount of initial investment.Therefore, in this scenario, option BC is the most suitable option to be undertaken.

Solution C

It is expected that the company has $5.5 million available as excess cash and it is seeking for a suitable investment plan. The company has three available investment plans and each project is independent to one another, which means selection of one option will not affect the other.Therefore, under the required cash the company has two available options; either it can invest in project A or in the combination of projects BC. The company should undertake the projects B and C because both projects require total$5 million which is under the available cash and generating more NPV than project A which requires$5.5 million and generates less NPV.

Question 2

Toys-4-Kids

Solution A Pro Forma Financial Statements

Pro forma of income statement and balance sheet are formed for quarter 3 and 4. It is expected that CGS is 70% of the sales, and operating expenses will remain same for the quarter 3 and 4.In addition, for quarter 1 and 2,the profit before tax is calculated,which is $400 million and $940 million. It is expected that the income taxes are 40% of profit before tax and deducting this value from the profit before tax for the quarter 3 and 4 is calculated is $240 million and $564 million for both quarters respectively.

The balance sheet of both quarters is formulated by taking the assumptions that the minimum cash for both quarters will be $200 million.Accounts receivable are 75% of the sales and inventory remains same for both quarters. Moreover, forequarter 1 and 2 the total current assets are calculated, which are $3100 million and $4450 million for both quarter 3 and 4. It is expected that the net fixed assets will also remain same for both quarters. However, adding net fixed assets with the current asset, the total assets are calculated, which are $4100 million and $5450 million for both quarters.........................

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