Garmin Analysis - Looking To the Future



Garmin Analysis - Looking To the Future

Assault on the Smartphone Market

NPV Analysis

It can be defined as the sum of the separate cash flows of a project over a particular period of time. It is best used in the process of determining capital budget to evaluate the profitability of the investment for a particular time period. It can be calculated by determining the present value of cash inflows and the present values of cash outflows. An investment with negative Net present value is not accepted, as its cash flows must be negative over time. The formula for calculating NPV is NPV = - Co + C1 / (1+r)^t (Hoque. Z., 2005, p. 156).

Where r is the rate of return, t is the time period for which NPV is calculated, Co is initial period cash outflow and C1 is cash inflow. R also takes into account the impact of inflation.

For calculating NPV for evaluating the investment in Smartphone Industry, we have considered rate of return as 20% i.e. r = 20%, t = 3, Co = -300 million, C1 = 500 million. The NPV for the given scenario is calculated as follow;

The NPV for the investment in Smartphone Industry is estimated to be $47.22 million, therefore, we can conclude that since NPV is a positive value so we can accept and undertake the project for estimated rate of return 20% over the given time period.

IRR Analysis

The internal rate of return is a technique utilized in capital budgeting process in order to determine and compare the lucrativeness of proposed investment project. It is also referred as rate of return of discounted cash flow. Since it is internal return therefore, it does not take into account external factors like inflation, interest rates etc. It is utilized to determine if the project should be undertaken or not by identifying its appropriateness. The higher the rate, higher will be return on the investment. This rate should be higher than the least set acceptable rate of return or more than the cost of acquiring the desired capital. Usually cost of capital incorporates the environmental risk factors as well therefore, any internal rate of return higher than this particular cost of capital reflects that the project should be undertaken as it adds an additional value to the firm (Thron, C., and Moten, J., n.d.).

For calculating IRR for evaluating the investment in Smartphone Industry, we have considered rate of return as 20% i.e. r = 20%, t = 3, Co = -300 million, C1 = 500 million. The IRR for the given scenario is calculated to be 29.09%.

We can only accept this project when we compare it with the hurdle rate faced by the company i.e. the minimum acceptable rate of return, which is 8% during 2010.

The hurdle rate represents the lowest possible and acceptable rate of return on any investment provided the risks associated with opportunity costs. The hurdle rate of the company Garmin is estimated to discounted free cash ...