Final Case 22

Final Case 22 - Group #3: Eric Wozniak, Scott Marks,...

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Group #3: Eric Wozniak, Scott Marks, Jessica Wilson, Champ Kwunchaithunya, Sani Choocherd MGMT 612 Case #22: Sound Advice May 7, 2011
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Questions: 1. After reviewing the results of his analysis, in Exhibit 1, Will had enough information to analyze the risk of each project. He knew that he should concentrate on measuring and comparing the “stand-alone” risk of each proposal. Develop an analysis of the stand-alone risk of the three proposals mentioned in the case. If the shareholders of Sound Products are primarily concerned about choosing the project with the least amount of risk, which project should be implemented? The risk of each project is broken down into different scenarios for Sound Products. “Best”, “Most Likely”, “Almost Worst”, and “Worst” Case scenarios are assigned a probability value and a monetary value. To determine which of the three proposals minimizes shareholder risk, a probability tree is constructed to analyze which project should be selected. The probability tree determined that Sound Products should select the Noise Project to minimize risk and provide Sound Products with the best payback when taking into account each “case” scenario. In addition to the probability tree selecting the Noise Project, Sound Products also appears confident in the future avenues this project could lead them. Unlike the Car Audio Project, Sound Products has experience in the market to create ‘sound’ products. Unlike the Turntable Project, the Noise Project can diversify from home audio to possibly television or computer viewing applications, leading to additional value for the company. 2
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2. Regarding Mike’s question about the different contexts of risk, how is risk analysis for investment opportunities at a small firm (such as the mutually exclusive projects in the case) different from the type of risk analysis likely to be used by large, multinational firms? In particular, how does the availability of external capital such as publicly traded stock influence these decisions? Multinational firms or larger corporations usually evaluate projects by utilizing capital budgeting process. The approach is usually done by calculating the projected future cash flow. Weight Average Cost of Capital or Weight Marginal Cost of Capital is calculated and selected appropriately depending on cases. Then, common tools such as Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index, and Payback Period are used. In the context of risks, different firms in different industries have different constant of these values. For instance, a high-tech firm would require a much shorter payback period than a power plant firm due to the fast-changing environment of the industry. As of the multinational firms, they do not only engage in different type of
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Final Case 22 - Group #3: Eric Wozniak, Scott Marks,...

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