SUMMARY OF SIMULATION EXERCISE

By Pratheek PS Sailesh Kumar S 13338 13345

Adjusted presented value of the company for the year 2014 was $522.14m. The operating income for the current period i.e. 2014 turned out to be $43.26m exceeding the forecast. The number of projects available for the entire 5 year time period was 22, out of which 15 were selected. Profitability index was used to rank different projects and then project risk, NPV, IRR, EBITDA and cash flow statements were considered for selection.

Reasons for not selecting the projects:1. Grow with me Doll Line:

High risk associated with the projects. High investment of Payback period greater than 10 years. PI is very low (1.62).

2. Design your own Doll High risk associated with the project. High investment for 5 years. Uncertainty about the division ability to execute the market demands. 5 year cumulative EBITDA of the project is very low ($4.40m).

3. Childrens Accessory Line High risk project Low NPV, PI.

4. Replace Assembly Equipment at Sacramento Facility Very low NPV Low EBITDA No terminal value.

5. Expansion to England High payback period Low profitability index Low EBITDA No supporting projects available.

6. New East Coast Distribution Facility High lifetime project costs. Although payback is 4.6 years, NPV is very low at $12.12m for an investment of $16m. High risk associated since the investment is very high and there are no supporting projects to make this project a low risk endeavor. PI (1.21) is low when compared to other projects. Uneven cash flows projected.

7. New inventory control systems for Warehouse Very low PI 0.33. Low NPV of $0.44m. Uneven cash flows; investment of $0.75m in 2019. 5 year cumulative EBITDA is $-0.03m.

Key Learnings from the Simulation:

Profitability index should only be used for ranking the project. For actually taking the projects other factors such as cash flows, EBITDA, NPV, and IRR must be taken into consideration. Even if Budget is available feasibility of the projects must be considered before taking it up. Select projects which gives high returns in less number of years. If there is a high risk project, other low/medium risk project which complements the high risk project must be taken to minimize the risk and hence increase the return. The projects must be selected so as to align with the business objectives of the firm. Success of projects selected in the future years is dependent on the projects selected in the future years. Carefully analyzing the cash flows of the firm for any uneven cash flows. To make a tradeoff between risks associated with the projects and the profitability. Consider Terminal Values and Tax Shields associated with the projects while selection.