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Assignment on Accounting and Finance (doc)

   

Added on  2021-06-17

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Accounting and Finance

To: CEO, Pinto LimitedFrom: STUDENT’S NAMEDate: 16TH MAY, 2018Subject: Recommendation for new proposed projectIn order to understand the feasibility of the proposed plan, we have conducted the capitalbudgeting technique with of help of projected cash flows. The detailed research on theproposed project has helped us evaluate the viability project.Base case analysis:Using the data from the market research we have calculated few capital budgeting metrics forthe proposed project. These metrics will help us come to a conclusion on the financialviability of the project:ParticularsResultCommentNet presentvalue$5,605,816Net present value is the capital budgeting tool which helps theinvestor calculates the present value of cash benefits expectedto be earned[ CITATION Ade15 \l 1033 ]. It is the differencebetween the present value of cash inflows and cash outflows.If PV of cash inflows is higher than the project should beaccepted else not. In the given scenario the project is expectedto have a positive net present value. Hence the project seemsto create wealth and should be accepted.Pay-backperiod2.73 yearsPay-back period is another capital budgeting tool which helpsthe investor analyse the period within which the amountinvested in a project will be recovered.[ CITATION Day08 \l 1033] Generally id pay- back period is lower than the projectperiod the project is accepted. In the given proposal theinvestment period is of 6 years and the pay-back period isexpected to be 2.73 years. Therefore the proposal has a lowpay back period and the project should be accepted.Discountedpay-backperiod3.38 yearsDiscounted pay- back period is the capital budgeting toolsimilar to pay back period.[ CITATION Bie10 \l 1033 ] The cashflows used in determining the investment recoverable period

are discounted cash flows. This is generally higher than thenormal pay- back period. The discounted pay back for theproject is 3.38 years. This is lower than the project period andhence the project should be accepted. ProfitabilityIndex1.31 timesProfitability index is the tool which assists the investor tocalculate the profitability of the project.[ CITATION Pet12 \l1033 ] This tool helps calculate the earning per dollar invested.The PI for the said proposal is 1.31 times. This indicates thatthe project is expected to earn $1.31 for every dollar used inthe project. Since the earnings are more than investment theproject should be accepted.Internal Rateof return21.14%Internal rate of return helps calculate the actual return on theproject. [ CITATION Pip15 \l 1033 ]Based on expected cash flowsthe internal rate of return is calculated. If the IRR is equal ormore than the discount rate used, then the project should beaccepted. In the given case the IRR is 21.14% which is morethan the discount rate and therefore the project should beaccepted.Uncertainty analysis:The new project which is up for discussion is based on a whole lot of data extracted with thehelp of market research. The market research done for these projects are very detailed andbased on a lot of assumptions.[ CITATION Riv09 \l 1033 ] It is not easy to determine the expectedcash flows and required rate of return for a new proposal. These results of market researchare based on the economy existing before the execution of the proposal. The market isuncertain and even a very small information may result in changes in the outcome of theproposal. Therefore, there is always a risk of uncertainty in capital budgeting planning. Sensitivity Analysis:Sensitivity analysis is the part of capital budgeting analysis which helps to understand thesensitivity of the project outcome based on changes in its input[ CITATION Sei09 \l 1033 ]. Wehave conducted the sensitivity analysis of the said proposal with respect to change in thediscount rate, change in sale units and in change in working capital requirements. Thefollowing graph shows the sensitivity of the project outcome with respect to these inputs:

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