Projects - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

Download Projects - E-Commerce - Lecture Slides and more Slides Fundamentals of E-Commerce in PDF only on Docsity! 320 The  OpGon  to  Expand/Take  Other  Projects   320 ¨  Taking  a  project  today  may  allow  a  firm  to  consider  and  take  other   valuable  projects  in  the  future.  Thus,  even  though  a  project  may  have  a   negaGve  NPV,  it  may  be  a  project  worth  taking  if  the  opGon  it  provides   the  firm  (to  take  other  projects  in  the  future)  has  a  more-­‐than-­‐ compensaGng  value.   Cash Flows on Expansion PV of Cash Flows from Expansion Additional Investment to Expand Firm will not expand in this section Expansion becomes attractive in this section Docsity.com 321 The  OpGon  to  Abandon   321 ¨  A  firm  may  someGmes  have  the  opGon  to  abandon  a  project,  if  the  cash   flows  do  not  measure  up  to  expectaGons.     ¨  If  abandoning  the  project  allows  the  firm  to  save  itself  from  further   losses,  this  opGon  can  make    a  project  more  valuable.   Present Value of Expected Cash Flows on Project PV of Cash Flows from Project Cost of Abandonment Docsity.com 324 a.  Post  Mortem  Analysis   324 ¨  The  actual  cash  flows  from  an  investment  can  be  greater  than  or  less  than   originally  forecast  for  a  number  of  reasons  but  all  these  reasons  can  be   categorized  into  two  groups:   ¤  Chance:  The  nature  of  risk  is  that  actual  outcomes  can  be  different  from   expectaGons.  Even  when  forecasts  are  based  upon  the  best  of  informaGon,  they   will  invariably  be  wrong  in  hindsight  because  of  unexpected  shiQs  in  both  macro   (inflaGon,  interest  rates,  economic  growth)  and  micro  (compeGtors,  company)   variables.   ¤  Bias:  If  the  original  forecasts  were  biased,  the  actual  numbers  will  be  different  from   expectaGons.  The  evidence  on  capital  budgeGng  is  that  managers  tend  to  be  over-­‐ opGmisGc  about  cash  flows  and  the  bias  is  worse  with  over-­‐confident  managers.   ¨  While  it  is  impossible  to  tell  on  an  individual  project  whether  chance  or   bias  is  to  blame,  there  is  a  way  to  tell  across  projects  and  across  Gme.  If   chance  is  the  culprit,  there  should  be  symmetry  in  the  errors  –  actuals   should  be  about  as  likely  to  beat  forecasts  as  they  are  to  come  under   forecasts.  If  bias  is  the  reason,  the  errors  will  tend  to  be  in  one  direcGon.   Docsity.com 325 b.  What  should  we  do  next?   325        ........  Liquidate  the  project                ........  Terminate  the  project              ........  Divest  the  project              ........  ConGnue  the  project     € NFn (1 + r)nt =0 t =n ∑ > 0 > Divestiture Value€ NFn (1 + r)nt =0 t =n ∑ < Divestiture Value € NFn (1+ r)nt=0 t=n ∑ < 0 € NFn (1 + r)nt =0 t =n ∑ < Salvage Value Docsity.com 326 Example:  Disney  California  Adventure   326 ¨  Disney  opened  the  Disney  California  Adventure  (DCA)  Park  in  2001,  at  a   cost  of  $1.5  billion,  with  a  mix  of  roller  coaster  ridesand  movie  nostalgia.   Disney  expected  about  60%  of  its  visitors  to  Disneyland  to  come  across  to   DCA  and  generate  about  $  100  million  in  annual  aQer-­‐cash  flows  for  the   firm.   ¨  By  2008,  DCA  had  not  performed  up  to  expectaGons.  Of  the  15  million   people  who  came  to  Disneyland  in  2007,  only  6  million  visited  California   Adventure,  and  the  cash  flow  averaged  out  to  only  $  50  million  between   2001  and  2007.     ¨  In  early  2008,  Disney  faced  three  choices:   ¤  Shut  down  California  Adventure  and  try  to  recover  whatever  it  can  of  its  iniGal   investment.  It  is  esGmated  that  the  firm  recover  about  $  500  million  of  its  investment.   ¤  ConGnue  with  the  status  quo,  recognizing  that  future  cash  flows  will  be  closer  to  the   actual  values  ($  50  million)  than  the  original  projecGons.   ¤  Invest  about  $  600  million  to  expand  and  modify  the  par,  with  the  intent  of  increasing   the  number  of  asracGons  for  families  with  children,  is  expected  to  increase  the   percentage  of  Disneyland  visitors  who  come  to  DCA  from  40%  to  60%  and  increase  the   annual  aQer  tax  cash  flow  by  60%  (from  $  50  million  to  $  80  million)  at  the  park.     Docsity.com