Case study In the given assignment, Robert was expecting to add a new product in his business portfolio. The right of selling chocolate of Kokoa SA has been given to Robert. This right has been given for five years in exchange for an upfront payment. Moreover, the product has been provided by Kokoa SA in a discount rate of 40%. As per the requirements of the assignment it is required to prepare discounted cash flow, net present value and sensitivity analysis. Robert decided to invest $ 100000.
In order to identify the feasibility and profitability of the business given in the assignment, Net Present Value and Discounted Cash Flow is calculated. As per the case study, Robert was the owner of the business who was planning to launch a new product in his product portfolio. The details of the business has been given in the case and thus it will be used to identify the feasibility and profitability of the business with the help of Net present Value, Discounted cash flow and sensitivity analysis. The Net Present Value strategy or NPV technique is a critical capital planning or undertaking evaluation system. This strategy takes into record the time estimation of cash. Considering, time estimation of cash supports in rolling out acclimation to the improvements in the estimation of cash of future money streams. This builds the effectiveness of undertaking evaluation strategies. In NPV technique, the present estimations of future money streams are controlled by reducing those future money streams at a suitable marking down rate Net Present Value Method.
Summary of assumptions
The analysis portion of this assignment involves preparation of cash flow table on the basis of provided information, preparation of discounted cash flow table based on the cash flow table and calculation of net present value.
The assumptions that have been made in the preparation of cash flow tables and discounted cash flow table are based on Generally Accepted Accounting Principles or GAAP principles. There are four assumptions that are required to be taken in to consideration as proposed by the GAAP principles in the process of preparation of financial statements including cash flow statement, income statement and balance sheet. The first assumption is known as business entity concept or assumption. The business entity assumption states that a business is required to be considered as a legal unit that has an existence separate from its owners, managers or employees (Barone et al., 2011). In other words the economic activities of the entity is separated from that of its owners or managers in such a way that only business activities are taken into consideration in the process of assessing recording events and transactions in the books of accounts. The second assumption is money measurement concept or assumption. According to the money measurement concept, only those business transactions and events are recorded in the accounts that can be expressed in a common unit of measurement usually in monetary terms. In other words, irrespective of the importance or significance it holds, a transaction cannot be recorded as a business transaction until and unless it is expressed in monetary terms. The third assumption is the going concern concept or assumption. According to the going concern concept, a business is supposed to run for an indefinite period of time. In other words, a business never intends to curtail or liquidate its operational scale in the foreseeable future. The fourth assumption is the accounting period concept or assumption. According to the accounting period concept or assumption, a business period needs to be segregated in to shorter time scales called accounting periods. Business accounting is done at the end of these time scales periodically. This segregation of business life is required so as t0 understand the direction of business in terms of profitability, feasibility and sustainability and take corrective actions as and when required.