Auditizz Electronics RTT Production Evaluation

ACC211 REPORT PROJECT
Task 2

1. INTRODUCTION
In a bid to remain competitive, the CEO of Auditizz Electronics is considering an
investment into the production of ‘real-time translators’ (RTT) that will significantly
increase the company’s revenue.
The aim of the report is to give recommendations on whether Auditizz Electronics
should run a full production of the new RTT using both discounted and non-discounted
cash flow procedures.
Discounted and non-discounted cash flow methods may be used to evaluate the
viability of new projects such as a production line or investment in new equipment or
plant (Accounting Explained, 2019).
Discounted Cash flow methods calculate cash inflows and outflows during the assets
lifetime. These inflows and outflows are then discounted at the rate the company
expects to earn on their investment (Tucker, 2009).
There are several discounted cash flow methods. They are Internal Rate of Return (or
IRR), Discounted Payback Period (PBP) , Net Present Value (or NPV), and the
Profitability Index.
Non-discounted methods don’t consider the concept of the time value of money, hence
no discounting of cash flows. Examples of non-discounted valuation methods include
Payback Period and the Accounting Rate of Return (ARR).
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2. PROJECT EVALUATION METHODS
2.1 NON-DISCOUNTED PAYBACK PERIOD
The following assumptions have been made
Initial investment $103,500,000
Asset’s useful life 6 years
Depreciation expense per year $17,250,000
Annual fixed cost $11,200,000
Variable cost per unit year 1 $515
Inflation 2%
Unit price year 1 $850
Growth in unit price 3%
Income tax rate 30%
Discount rate 11%
Market value at time 4 $20,500,000
Book value at time 4 $34,500,000
Using the above assumptions and a four year time horizon, the after tax net and
cumulative cash flows for the full production run of the new RTT are summarized in the
table below.
Time After Tax Net Cash flow
Cumulative After Tax Cash
flow
0 -$ 125,812,500.00 -$ 125,812,500.00
1 $ 21,957,500.00 -$ 103,855,000.00
2 $ 35,576,840.00 -$ 68,278,160.00
3 $ 45,751,375.70 -$ 22,526,784.30
4 $ 91,178,739.18 $ 68,651,954.88
The payback period is the amount of time it takes for a production line to recover its
initial investment costs (EduPristine , 2018).
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