Investors are facing the uncertainty of not reaching the target sales of 143 licences in Year 1 and 2 (73 in the baseline case plus an additional 70 licences) which would yield an IRR of 30.7%. This IRR is well above the discount market rate and acceptable to investors.
However, there are disruptions in the market, such as, increased competition by competitors and an economic downturn at the same, which lead investors believe that the selling is not attainable and instead of rejecting the investment outright, as for family and political reasons investors want to explore the limit to which sales may drop and still recover the investment.
Thus, it has been agreed to further carry out a risk analysis to determine, at the limit, an acceptable lower IRR to recover the investment which still would yield an acceptable positive NPV. For this purpose it has been established that as a minimum IRR has to be 20%, which would still be above the discount rate while providing a risk buffer over the 10% discount rate.
To achieve this target an iterative process to calculate the IRR will be implemented, starting with an additional sale of 45 licences. If this attempt is not successful then a second iterative process will be carried out with higher or lower sales in Y1 and 2 until the IRR 20% is reached.
1. First Iteration: Increase sales from Baseline Case by 45 additional licences in Year 2
The following calculations are performed as above:
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