Accounting And Finance Investment Analysis

Running head: ACCOUNTING AND FINANCE
Investment Project Analysis
Name of the Student:
Name of the University:
Author’s Note:

1INVESTMENT PROJECT ANALYSIS
Table of Contents
Introduction......................................................................................................................................2
Discussion and Analysis..................................................................................................................2
Initial Investment of Machinery..................................................................................................2
Cash Inflows................................................................................................................................3
Cash Outflows.............................................................................................................................4
Taxation.......................................................................................................................................4
Discount Rate or Required Rate of Return..................................................................................4
Net Present Value and Internal Rate of Return...........................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

2INVESTMENT PROJECT ANALYSIS
Introduction
The investment project has been prepared for the Carter Enterprise Project in which the
company is considering capital investment program of $8,000,000 in the form of capital
expenditures for well purchasing a computerized/robotic system that would be handling the
various business operations and activities that is carried in the warehouse of the company. The
key reason behind the proposal of investment profile or investment is due to the retirement that a
number of employee would be taking in the current year. Now the firm would be well hiring one
new employee for each three employees that would be retiring1. The additional loss of manpower
or the employee base that the company would be experiencing will be well offset with the help
of the introduced new automated system. The considered project is for a term period of six years
in which the various cash flows that the company would be experiencing from the evaluated
project has been well considered.
Discussion and Analysis
The analyzed project investment would not only be done in order to well compensate for
the manpower losses that the company would be experiencing but also would be improving the
overall efficiency of the business process and activities that it carries on. Improvement in the
inventory management and thereby reducing the number of unhappy customers and dollar
amount of the net sales will be some of the key factors. The investment project will be well
analyzed with the help of the Net Present Value benefit that the company would be getting from
the project. The capital budgeting technique selected will help the company better analyze the
wealth that would be well created if the company well accepts the project. On the other hand, the
application of internal rate of return has also been done for well analyzing the return from the
project in the form of percentage return that would be generated in the given time frame.
Initial Investment of Machinery
The initial investment that would be done in the project would be around $8 Million and
the same would be well done in the form of capital expenditure that the company would be
1 Levin, Victoria, and Anna Hallgren. "The choice of capital budgeting techniques: a human capital approach."
(2017).

3INVESTMENT PROJECT ANALYSIS
doing. The project life is considered as the life of the system installed that is around six-years of
time frame in which relevant changes in the cash flows would be considered. Depreciation
associated with the project would be done on a straight line basis and the cash flows for the same
would be considered as a tax-deductible interest expenses2. It is important to note that the
depreciation acts as a non-cash expenses in which the cash flows are well shown so that the
entity or organization can get a tax-shield from the same. The same has been well applied in the
due course of project whereby the adjustment of depreciation is shown on a pretax basis initially
and after accounting for taxes the same has been added back to net cash flows so that we can get
the free cash flows for the firm that would be flowing to the firm. Finally after accounting for
depreciation and initial investment, the scrap value that the company would be realizing from the
sale of asset would be around 20% of the original value that is around $1.6 Million. The same
will be considered as cash inflow for the company under the head scrap value. The value
received would be charged on the basis of amount received multiplied by the statutory tax rate of
the company in order to report tax expenses3.
Cash Inflows
The cash inflows that the company in particular would be receiving will be in the form of
labor related cost savings that the company would be seeing. Labor related cost savings will be
generally in the form of saving of wages and salaries that the company would be saving from the
same. The cash inflows from the cost savings is expected to well increases as the office
automation process goes on during the project time period. The other key set of cash inflows that
the company would be receiving from the same would be in the form of recovering sales amount
from fewer stocks4. The ongoing installation of machinery and automated system would be well
helping the company in well managing the recovery of sales that the company initially used to
loose. The cash flows or the amount of savings or the increase in sales value on a dollar basis is
expected to consistently increase in the trend period evaluated.
2 Su, Shu-Hui, et al. "Application and effects of capital budgeting among the manufacturing companies in Vietnam."
International Journal of Organizational Innovation (Online) 10.4 (2018): 111-120.
3 Siziba, Simiso, and John Henry Hall. "The evolution of the application of capital budgeting techniques in
enterprises." Global Finance Journal (2019): 100504.
4 Al-Mutairi, Abduallah, Kamal Naser, and Muna Saeid. "Capital budgeting practices by non-financial companies
listed on Kuwait Stock Exchange (KSE)." Cogent Economics & Finance 6.1 (2018): 1468232.

4INVESTMENT PROJECT ANALYSIS
Cash Outflows
The key set of cash outflows that the company would be experiencing from the project
investment considered is in the field of fixed expenses and variable expenses that the company
would be experiencing from the given project. Variable expenses would be in the form of
increased amount of sales that the company would be seeing in the six year trend period. The
costs that would be associated will be in the form of additional sales done or recovery of sales in
each year multiplied by 60% of total sales value representing the variable cost or the cost of
goods sold for the company5. The additional annual fixed costs that the company would be
experiencing would be also increasing in the project life which would be around $300,000 in the
base year and the same is expected to well increase by around $18,000 on an yearly basis.
Depreciation expenses has already been accounted for which the company would be reporting as
a non-cash expenses for the purpose of getting tax shield.
The other key expense that the company would be experiencing as a result of installing
the machinery would be in the form of System Up gradation expenses, which would be well
experienced in the third year which is expected to be around $350,000 as a one-time expenses6.
Taxation
The Earnings before tax (EBT) reported by the company would be well taxed at the given
state or level of taxation rate that is around 30% at which the profits of the company would be
taxed. It is important to note that after accounting for taxes depreciation was added back as the
item is reported as a non-cash expenses and was solely reported for reducing the tax liability of
the company7.
Discount Rate or Required Rate of Return
The required rate of return which has been well calculated with the help of the Weighted
Average Cost of Capital in which the cost and weightage of the various financing sources that
the company are used to get the cost of capital. The WACC for the Cater Enterprise is around
5 Nawaiseh, Mohammad Ebrahim, et al. "The Use of Capital Budgeting Techniques as a Tool for Management
Decisions: Evidence from Jordan." International Conference on Engineering, Project, and Product Management.
Springer, Cham, 2017.
6 Shaban, Osama Samih, Ziad Al-Zubi, and Ahmad Adel Abdallah. "The Extent of Using Capital Budgeting
Techniques in Evaluating Manager¡¯ s Investments Projects Decisions (A Case Study on Jordanian Industrial
Companies)." International Journal of Economics and Finance 9.12 (2017): 175-179.
7 Chadha, Saurabh, and Satyendra Kumar Sharma. "Capital budgeting practices: a survey in the selected Indian
manufacturing firms." International Journal of Indian Culture and Business Management 18.4 (2019): 381-390.

5INVESTMENT PROJECT ANALYSIS
14%, which well represents the risk and return that the investors are well willing to take in order
to earn a given set of cash flows from the company. However, it is important to note that in order
to well evaluate Capital Budgeting Project the company uses a discount rate of about 16% which
is higher than the WACC of the company. The key reason for the higher set of required return
from the capital budgeting project can be primarily because of the higher risk involved or due to
higher set of uncertainty regarding the various cash flows that would be flowing to the company
on a whole considerate basis8. A discount factor would be well generated for each of the time
period for the project undertaken so that we can well get the discounted cash flows for the firm
and the Net Present Value of the project on a whole 9.
Net Present Value and Internal Rate of Return
The net present value or the NPV shows the net value that the project would be creating
for the equity shareholders if they well accept the given set of project. The project NPV has been
well calculated after taking all the cash inflows and cash outflows that they would be observing
for the given set of six years. The NPV for the project analyzed was calculated to be around
$75,141 which has been well calculated with the help of 16% as the discount rate for the project.
The results shows that if the project is accepted by the company the same would be creating an
value for the equity shareholders of the company by around $75,141 after accounting for all the
expenses and inflows. On the other hand, if we well compare the project return in the form of
percentage terms than the same has been around 0.27% which well states that the project on a
whole would be generating a return of 16.27% which is greater than the required rate of return of
16%10.
8 Kengatharan, Lingesiya. "Capital budgeting theory and practice: a review and agenda for future research." Applied
Economics and Finance 3.2 (2016): 15-38.
9 Alkhamis, Nora, et al. "Capital Budgeting and Capital Structure Decisions in Saudi Arabia." Advanced Science
Letters 23.1 (2017): 330-332.
10 Hall, John H., and T. Sibanda. "Capital Budgeting Practices: An Empirical Study of Listed Small en Medium
Enterprises." Corporate Ownership & Control (2016): 200.

6INVESTMENT PROJECT ANALYSIS
Carter Enterprise Project Investment Analysis
Particulars 0 1 2 3 4 5 6
Initial Investment
($8,000,000
)
Labor Related Cost Savings $1,700,000 $1,870,000 $1,950,000 $2,150,000 $2,220,000 $2,350,000
Recovered Sales from Fewer
Stocks $1,800,000 $2,170,000 $2,330,000 $2,450,000 $2,500,000 $2,580,000
Variable Cost Linked to
Recovered Sales
($1,080,000
)
($1,302,000
)
($1,398,000
)
($1,470,000
)
($1,500,000
)
($1,548,000
)
Additional Annual Fixed Costs ($300,000) ($318,000) ($336,000) ($354,000) ($372,000) ($390,000)
Depreciation Expenses ($620,000)
($1,240,000
)
($1,240,000
)
($1,240,000
)
($1,240,000
)
($1,240,000
)
Sale of Used System $0 $0 $0 $0 $0 $1,600,000
System Upgrade Expenses $0 $0 ($350,000) $0 $0 $0
Cash Flow Before Taxation
($8,000,000
) $1,500,000 $1,180,000 $956,000 $1,536,000 $1,608,000 $3,352,000
Taxation @ 30% ($450,000) ($354,000) ($286,800) ($460,800) ($482,400)
($1,005,600
)
Cash Flow After Taxation
($8,000,000
) $1,050,000 $826,000 $669,200 $1,075,200 $1,125,600 $2,346,400
Add: Non-Cash Expenses
(Depreciation) $620,000 $1,240,000 $1,240,000 $1,240,000 $1,240,000 $1,240,000
Free Cash Flows
($8,000,000
) $1,670,000 $2,066,000 $1,909,200 $2,315,200 $2,365,600 $3,586,400
Discount Rate @ 16% 1.00 0.86 0.74 0.64 0.55 0.48 0.41
Discounted Cash Flows
($8,000,000
) $1,439,655 $1,535,375 $1,223,144 $1,278,664 $1,126,293 $1,472,010
Net Present Value (N.P.V) $75,141
Internal Rate of Return
(I.R.R) 0.27%
Conclusion
The investment analysis done for the six-year project considered by the company will be
well helping the company in well creating a positive wealth for the company. The NPV of the
project is positive and the capital budgeting technique analyzed is also considered as the supreme
criteria for investment evaluation. It is important to note that with the project investment

7INVESTMENT PROJECT ANALYSIS
considered the company would not only be benefitting financially, the company would also be
seeing the business operational efficiency which in turn would be creating value and further
business expansion opportunity internally.

8INVESTMENT PROJECT ANALYSIS
References
Levin, Victoria, and Anna Hallgren. "The choice of capital budgeting techniques: a human
capital approach." (2017).
Su, Shu-Hui, et al. "Application and effects of capital budgeting among the manufacturing
companies in Vietnam." International Journal of Organizational Innovation (Online) 10.4
(2018): 111-120.
Siziba, Simiso, and John Henry Hall. "The evolution of the application of capital budgeting
techniques in enterprises." Global Finance Journal (2019): 100504.
Al-Mutairi, Abduallah, Kamal Naser, and Muna Saeid. "Capital budgeting practices by non-
financial companies listed on Kuwait Stock Exchange (KSE)." Cogent Economics & Finance 6.1
(2018): 1468232.
Nawaiseh, Mohammad Ebrahim, et al. "The Use of Capital Budgeting Techniques as a Tool for
Management Decisions: Evidence from Jordan." International Conference on Engineering,
Project, and Product Management. Springer, Cham, 2017.
Shaban, Osama Samih, Ziad Al-Zubi, and Ahmad Adel Abdallah. "The Extent of Using Capital
Budgeting Techniques in Evaluating Manager¡¯ s Investments Projects Decisions (A Case Study
on Jordanian Industrial Companies)." International Journal of Economics and Finance 9.12
(2017): 175-179.
Chadha, Saurabh, and Satyendra Kumar Sharma. "Capital budgeting practices: a survey in the
selected Indian manufacturing firms." International Journal of Indian Culture and Business
Management 18.4 (2019): 381-390.
Kengatharan, Lingesiya. "Capital budgeting theory and practice: a review and agenda for future
research." Applied Economics and Finance 3.2 (2016): 15-38.
Alkhamis, Nora, et al. "Capital Budgeting and Capital Structure Decisions in Saudi
Arabia." Advanced Science Letters 23.1 (2017): 330-332.

9INVESTMENT PROJECT ANALYSIS
Hall, John H., and T. Sibanda. "Capital Budgeting Practices: An Empirical Study of Listed Small
en Medium Enterprises." Corporate Ownership & Control (2016): 200.