ECSY-COLA IN INGLISTAN Minicase solution, Chapter 11 Principles of Corporate Finance, 12th Edition R. A. Brealey, S.C. Myers and F. Allen Libby Flannery prepared the attached spreadsheet to analyze the NPV of Ecsy-Cola’s proposed investment in Inglistan. With the inputs suggested in the mini-case, NPV was very slightly negative on a $20 million outlay. Libby was conscious of the spreadsheet’s simplifying assumptions. First, the project cash flows were projected as a perpetuity. The project, if successful, would generate cash returns for a long time, but not forever. On the other hand, the 25% nominal discount rate handed down from Ecsy-Cola’s headquarters seemed unreasonably high – there was clearly a built-in fudge factor.1 She decided to check her results with a more reasonable discount rate, say 15%. Optimistic Most Likely Pessimistic If Libby waited a year, and discovered that potential sales were only 20 million liters per year, Ecsy-Cola would not invest. Then the downside NPV, assuming a 25% discount rate, would be zero, not −$14.9 million. The payoff to waiting would be: 1Libby used her spreadsheet to conduct a sensitivity analysis, assuming for simplicity that the optimistic and pessimistic probabilities were each 25%: Steady-State Sales $ millions 80 50 20 .25 .50 .25 Probability NPV at 25%, $ millions + 14.8 - 0.1 - 14.9 NPV at 15%, $ millions + 42.9 + 15.7 - 11.6 See Chapter 9. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Expected NPV, invest in year 1 = .25 14.8 + .50 (−0.1) + .25 0 = + $3.65 million At a 15% discount rate, the expected NPV from investing in year 1 would be +$18.6 million. These calculations suggested a “wait and see” strategy. The problem with that strategy was potential competition. If steady-state sales turned out higher than now expected – 80 million liters per year, for example – then Sparky-Cola, or some other competitor, would surely enter. Therefore the high cash flows for the optimistic case were not sustainable in the long run, and the optimistic-case NPVs, while no doubt positive, were less than her spreadsheet suggested. Competition would limit the upside NPVs. Libby realized that investing right away, and establishing the Ecsy-Cola brand in Inglistan before her competitors could act, gave her best chance of generating a significant positive NPV. In the optimistic scenario, competition would come sooner or later, but Ecsy-Cola would have a head start and probably the largest market share. If Ecsy-Cola was just breaking even (earning its cost of capital), competitors would have no incentive to enter. Libby had to weigh the competitive advantages of investing immediately against the possibility of a costly mistake. Therefore she refocused her analysis on establishing the minimum potential size of the market. If NPV at that minimum was at least zero, or perhaps an acceptably small negative number, she resolved to invest right away. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 本文来源：https://www.wddqw.com/doc/c86caf8030d4b14e852458fb770bf78a64293a67.html