Consulting Checklist

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Among the four options, “Micro-Insurance” is the least attractive one. There are already many competitive insurance providers in the market and GTM has never provided insurance services, so growth opportunities for GTM is rare. Additionally, this alternative may require treatments and procedures not currently available and attentions in locations other than Mexico City, therefore it should be done after the expansion in other markets and expansion beyond Mexico City.

Question 4: What are the key assumptions of this investment decision? (i.e., perform a sensitivity analysis to determine what factors are driving the NPV base case calculation.)

Key assumptions of this investment decision include Discount Rate, Daily Hire Rate, Depreciation Assumption, Tax Rate, Operating Cost, Change in NWC, Initial Net working Capital and Salvage Value. Among all factors above, NPV and IRR are very sensitive to Daily Hire Rate, which affects hiring revenue. Moreover, if Daily Hire Rate increases by 20%, NPV is positive ($695,353.22). In this case, we should accept this project and IRR is higher than discount rate. What is more, NPV is most sensitive to discount rate. When discount rate decreases by 20%, NPV is positive ($256,505,400.05) and we should accept this project. However, other assumptions have a moderate impact on NPV and IRR. Changes of these factors by 20% will not influence our decision since NPVs are still negative.

Sensitivity Analysis

Input Estimate

Down 20%

Base Case

Up 20%

Discount Rate

NPV

$256,505,400.05

($5,077,349.25)

($12,204,965.71)

IRR

5.97%

5.97%

5.97%

Daily Hire Rate

NPV

($10,850,051.71)

($5,077,349.25)

$695,353.22

IRR

2.41%

5.97%

9.41%

Depreciation of

the Ship

NPV

($5,439,720.99)

($5,077,349.25)

($4,714,977.50)

IRR

5.82%

5.97%

6.14%

Tax

NPV

($3,596,751.49)

($5,077,349.25)

($6,557,947.00)

IRR

6.85%

5.97%

5.10%

Operating Costs

NPV

($3,462,036.39)

($5,077,349.25)

($6,692,662.10)

IRR

6.96%

5.97%

4.95%

Change in NWC

NPV

($5,053,265.47)

($5,077,349.25)

($5,101,433.02)

IRR

5.99%

5.97%

5.96%

Initial Net

Working Capital

NPV

($4,993,181.25)

($5,077,349.25)

($5,161,517.24)

IRR

6.02%

5.97%

5.93%

Salvage Value

NPV

($5,227,546.81)

($5,077,349.25)

($4,927,151.68)

IRR

5.86%

5.97%

6.09%

Summary: From sensitivity analysis, we know that discount rate and daily hire rate are key assumptions to NPV. If we decreases discount rate by 20% or increases daily hire rate by 20%, NPV will be positive, thus we should accept this project.