Analysis of Investo Case

Analysis of Investo Case

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The President and CEO of MFS were approached by the consultant of Investo with a proposal where they wanted to give MFS 30% of the company's equity and the right to market the products under MFS' international distributing channels. Investo wanted this to be exchanged with $10.5 million that was required to expand the business. Therefore the amount that MFS would invest was $10.5 million in addition to the workforce that amounted to $150,000 every year with the opportunity cost of $230,000 as indicated in exhibit 2. In addition, the cost of advertising would cost MFS $7,324,059 as indicated in exhibit 2. Therefore, the total amount invested to MFS would be $18,204,059. This was oblivious to the size of the market, competition from other companies and the costs of production even though the new product had growth potential. The manufacturing value of Investo based on Net Present Value is $ 9,998,216 and MFS is entitled to 30% of this value which gives;

30/100×9,998,216 = $ 2,999,464.8

The amount that MFS will get instantly as compared to what they will invest is much less.

The value of the investment when the cost of the sales force is included will be:

$ 10,500,000 + $ 230,000 = $10,730,000 + $ 150,000 = $ 10,880,000

When the sales force is excluded the amount will be $ 10,500,000. Therefore, MFS should not agree to cater for the amount of sales costs as it is too costly and recovering the money will take longer. Derrick Bond should be attentive when it comes to investing in the project. Even though the project is promising and there are high chances that the new product from Investo will grow, he should not be naïve at risk-taking. It is important to have a long-term assurance that the invested money will be recovered. The terminal growth rate of the manufacturing projections of Investo is 5% thus meaning the 30% that MFS is expected to get will improve with time. However, considering the marketing cost will be catered by MFS is likely to make them recover their investments slowly. Thus, Derrick should agree to the proposal but should ask Investo to cater for the advertising cost and the sales force. This will greatly reduce the costs to be incurred by MFS.

Net Present Value refers to the difference between the current value of inflow of cash and the current value of the outflow of cash within a specified period of time (Hopkinson, 2017). It is used in the analysis of profitability of a firm due to the projects or investments at hand. Sensitivity