4.5. Summary of scenario analysis

In the Table 4.13 and 4.20 I could see that NPV and PI do not change consequently the advantages of the third contract could not be preserved, but rules of IRR tell us reject all three contract again (11.35, 13, and 20.36 lower than 24.4988, 24.9750, 25.988, and 26.499), but it is not real business life situation. I think that IRR calculation is not demonstrating the correct results in situation when the interest rate, inflation are increased. There are lots of possibilities to make a mistake, when a manager estimates the value of contract. The following tables where I calculate the discount rate and use MIBOR as risk-free rate, which is so high at a current moment, are showing incorrect result too. Manages must reject all three contracts. The last tables where I calculate the discount rate and use WACC as risk-free rate are showing more reliable results. That is why I make conclusion that the easiest and the most reliable method of calculation the discount rate is to use the WACC of company as risk-free.

4.6. Final analysis and Decision Card (Step 7)

Figure 4.3

When manager completes all calculations and estimates all factors it is time to fulfill the “Decision Card” and make decision about contract. There are two variants- to accept or to reject. Let’s have a look at the Figure 4.4. The number one of the decision card is juristic analysis. The points 0.6 means that Contract (I) has a legal force, but the interests of a buyer are not defended enough in contract terms. So lower point means that manager has not good negotiation skills. Next points 0.65 means that Contract (II) has a legal force and manager tries to defend interests of a buyer, but it is not enough. The Contract (III) has got higher points 0.75 which means that the contract has a legal force and manager finds out the balance of interests between counterparty’s.

Decision Card

	Contract I	Contract II	Contract III
1. Juristic analyses of the contract (Negotiations)	0.6	0.65	0.75
2. Risk of delivery	0.9	0.45	0.37
3. Risk of payment technique	0.9	0.62	0.54
4. Country risk	(RF BBB, EU AAA)
5. Counterparty risk: a) predicting the bankruptcy ( Z-score)	Y	y	Y
6. Cash Flow: a) Forecasted CF b) Real CF	z x	z x	z x
7. Discount Rate:	WACC
8. Penalty points for manager	-28.35	-22.14	-10.99
9. Calculations: a) NPV b) PI c)PP	229 919.45 0.63866 4.9	229 925.62 0.63868 4.9	244 573.83 0.70891 3.8
10. Decision a) Accept b) Reject	reject	reject	Accept

Figure 4.4

Topics 2 and 3 of decision card estimate the risks of delivery and payment technique. I have described the procedure of risks estimation in our research in the topic 4.2.2 Table 4.10.

The country risk estimation technique was described in topic 2.8.1, but in this case I just have taken the Fitch ratings of the country (topic 2.8.2).

I include in decision card the predicted cash flows and real cash flows, that gap illustrate how accurately the forecast was made (topic 2.3).

The next step 7 is discount rate. In my research I made conclusion that the most appropriate discount rate for our case is WACC of company.

The 8 topic shows us how the managers use the working capital of company. The best position has the manager who has handled Contract III.

The 9 topic presents the results of calculation of NPV, PI and PP. we do not use the IRR because in our case in the current economical situation it shows unreal results and I think IRR technique is difficult to be used, but it provides the same result as NPV.

In the end of decision cards I reject the Contract I, Contract II and accept the contract III.