[Bicycle Company Future Expansion: Mystro-Wheels]

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Bicycle Company Future Expansion: Mystro-Wheels

Purchase Option

Year

Outflow

Inflow

Cash Flow

0

390000

0

-390000

1

0

0

2

0

0

3

73000

73000

4

73000

73000

5

73000

73000

NPV

(£35,449.06)

IRR

-13%

Payback

2.3

Rent Option

Year

Outflow

Inflow

Cash Flow

0

390000

0

-390000

1

66000

66000

2

66000

66000

3

66000

66000

4

66000

66000

5

66000

66000

NPV

(£34,854.55)

IRR

-5%

Payback

3.2

Rent Option should be chosen as the NPV of Rent Option is greater than that of Purchase Option. As per the calculations attached in excel sheet, we can easily say that Proposal 3 is the most suitable one for Mystro-Wheels. We have analyzed the given cash flows of two Proposals using techniques such as Net Present Value (NPV), payback period and Internal Rate of Return (IRR). The reason for analyzing two Proposals by multiple techniques is to increase the reliability and authenticity of our forecast. From the following table, we can easily see that Net Present Value of Rent Option is greater than that of Purchase Option. We accept the Proposal having highest value of NPV because higher the NPV, greater would be the returns and profitability of the Proposal.

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Effective financial managers have developed resource allocation skills for their ...