1.1 Project : SuperTread Tyre Brand
ABC Tyres has recently developed a new tyre, The Supertread. Managers and Financial Directors (Mr George Lee) must determine whether it is beneficial for the company to make the investment necessary to produce and market it. A report has been prepared analysing the concerns Mr Lee has with the company’s proposed new project.
1.2 Financial Decisions within ABC
Investment decisions have major consequences for the future development of a company, in this case ABC Tyres. Assessing a project under uncertainty can be an extremely complex task. Uncertain future events which could affect the entire economy, a business or a project, lead to variable cash flows, which have different values that the projected ones under certainty, in a deterministic environment (Bruner et al, 1998). Given the huge annual expenditure on capital projects and corporate acquisitions each year, the wise selection of discount rates is of material importance to financial managers such as Mr Lee. Estimating discount rate is always a benchmark in every valuation process. Cash flows appraisal follows a precise pattern. All we need to do is to focus only on entries required in the free cash flows model. Things become more complicated when assessing discount rates, because there are many valuation models, some of them are unrefined but strongly disputed, and some of them are complex but are not preferred by users (Brigham et al, 1990). Choosing a model for estimating discount rate depends on available information and on Mr Lee’s reasons and preferences.
1.3 Market Value Weights versus Book Value Weights
When deciding whether to use market value weights or book value weights, Mr Lee must be guided by the purpose of the analysis to decide which ...