OM Assignment Ananth Bharani (21A2HP436)

[Ref.: Example 5.2 - Decision Trees (Hackers Computer Store)]

Calculation of Net present Value (NPV) under various alternatives

1) Move to new location, Strong growth

Rate of
16%
interest
Discounting Present Value
Year Cash flow
factor (Discounted Cash flows)
0 -210,000 1.000 -210,000
1 195,000 0.862 168,103
2 195,000 0.743 144,917
3 195,000 0.641 124,928
4 195,000 0.552 107,697
5 195,000 0.476 92,842
Net Present Value (NPV) 428,487

2) Move to new location, Weak growth

Rate of
16%
interest
Discounting Present Value
Year Cash flow
factor (Discounted Cash flows)
0 -210,000 1.000 -210,000
1 115,000 0.862 99,138
2 115,000 0.743 85,464
3 115,000 0.641 73,676
4 115,000 0.552 63,513
5 115,000 0.476 54,753
Net Present Value (NPV) 166,544

3) Expand store, Strong growth

Rate of
16%
interest
Discounting Present Value
Year Cash flow
factor (Discounted Cash flows)
0 -87,000 1.000 -87,000
1 190,000 0.862 163,793
2 190,000 0.743 141,201
3 190,000 0.641 121,725
 4 190,000 0.552 104,935
5 190,000 0.476 90,461
Net Present Value (NPV) 535,116

4) Expand store, Weak growth

Rate of
16%
interest

Year Cash flow Discounting Present Value

factor (Discounted Cash flows)
0 -87,000 1.000 -87,000
1 100,000 0.862 86,207
2 100,000 0.743 74,316
3 100,000 0.641 64,066
4 100,000 0.552 55,229
5 100,000 0.476 47,611
Net Present Value (NPV) 240,429

5) Do nothing now, Strong growth, Expand next year

Rate of
16%
interest
Discounting Present Value
Year Cash flow
factor (Discounted Cash flows)
0 - 1.000 -
1 -87,000 0.862 -75,000
1 170,000 0.862 146,552
2 190,000 0.743 141,201
3 190,000 0.641 121,725
4 190,000 0.552 104,935
5 190,000 0.476 90,461
Net Present Value (NPV) 529,874

6) Do nothing now, Strong growth, Do not expand next year

Rate of
16%
interest
Discounting Present Value
Year Cash flow
factor (Discounted Cash flows)
0 - 1.000 -
1 170,000 0.862 146,552
2 170,000 0.743 126,338
3 170,000 0.641 108,912
 4 170,000 0.552 93,889
5 170,000 0.476 80,939
Net Present Value (NPV) 556,630

7) Do nothing now, Weak growth

Rate of
16%
interest

Year Cash flow Discounting Present Value

factor (Discounted Cash flows)
0 - 1.000 -
1 105,000 0.862 90,517
2 105,000 0.743 78,032
3 105,000 0.641 67,269
4 105,000 0.552 57,991
5 105,000 0.476 49,992
Net Present Value (NPV) 343,801
Decision Tree Analysis using NPV

Strong growth
0.550

Move 310,613

Weak growth
0.450

Strong growth
0.550

Hackers Computer Store Expand 402,507

Weak growth
0.450

Strong growth
0.550

Do nothing 460,857

Weak growth
0.450
Revenue - Move_Cost (NPV) =
428,487

Revenue - Move_Cost (NPV) =

166,544

Revenue - Expansion_Cost (NPV) =

535,116

Revenue - Expansion_Cost (NPV) =

240,429

Expand Revenue - Expansion_Cost (NPV) =

529,874

Do nothing
556,630

Do nothing Revenue (NPV) =

556,630

Revenue (NPV) =
343,801