Case 1: Baku Co.

NPV Example Case

Financial Investment Decision Making using the Discounted Cash Flow models.

Baku Co is reviewing investment proposals. The funds available for investment are around AZN
800,000 for the current year. Details of 3 (three) possible investment opportunities, are given
below:

Project 1
An investment of AZN 300,000 toward the automation of the production cycle (using AI and
robots in the production). Each robot would be on an individual employee basis and would lead
to savings in labor costs from increased efficiency and from reduced absenteeism due to work-
related illness. Savings in labor costs from these assessments in money terms are expected to
be as follows:
Year: 1st 2nd 3rd 4th 5th

Cash Savings (AZN'000): 85 90 95 100 95

Project 2
An investment of AZN 450,000 in computerization of the procurement and logistics proceses
and replacement of current staff that is expected to reduce administration costs by AZN
140,800 per annum for the next five years.

Project 3
An investment of AZN400,000 in new self-service (self-payment checkout) machines at all
supermarkets. Net cash savings on salaries of cashiers across all supermarkets is expected
around AZN120,000 per annum during the five-year life of the machines.

Baku Co has a cost of capital of 12.3%. Taxation should be ignored at this point.

Questions to solve:
1. Calculate Payback Period of each project.
2. Calculate NPV of each project.
3. Advise on which is the most lucrative investments that will maximize the shareholders’
wealth. Propose the order of investments (ranking).
4. What about maximization of the stakeholders wealth?
5. Discuss other aspects of the investment decision making (social, etc.)