Analysis of Nutty Nut Brand for Factory Refurbishment and Technology Upgrade

This report analyzes the Nutty Nut brand for the proposed factory refurbishment and technology upgrade. It evaluates the project based on after tax cash flows, payback period, net present value, and profitability index. The analysis concludes that the project is not acceptable and recommends against proceeding with the refurbishment and upgrade.

Running head: ACCOUNTING AND FINANCE

1ACCOUNTING AND FINANCE
Table of Contents
Part A...............................................................................................................................................2
Answer (i)....................................................................................................................................2
Answer (ii)...................................................................................................................................2
Answer (iii)..................................................................................................................................4
(a) Evaluating 2 mutually exclusive project.......................................................................4
(b) Selecting project that shall be accepted by the company..............................................4
Part B...............................................................................................................................................5
Answer (a)(i)................................................................................................................................5
Answer (a)(ii)...............................................................................................................................5
Answer (b)(i)...............................................................................................................................5
Answer (b)(ii)..............................................................................................................................5
Answer (c)(i)................................................................................................................................6
Answer (c)(ii)...............................................................................................................................6
Answer (d)...................................................................................................................................6
Answer (e)...................................................................................................................................7
Reference.........................................................................................................................................8

2ACCOUNTING AND FINANCE

3ACCOUNTING AND FINANCE
Part A
Answer (i)
Refer to excel sheet
Answer (ii)
Introduction
Aim of the report is to carry out the analysis of Nutty Nut brand with regard to take up
the factory refurbishment and upgrade of technology. The analysis will be carried out on the
basis of budget produced by facilities management. Various methods those will be used for
analysing the product are after tax cash flows produced by the project, it’s payback period,
profitability index and net present value (Chandra, 2017).
Discussion
After tax cash flows – after tax cash flow is the amount of cash flows generated by the project
after deducting all the operating expenses from operating income and charging tax expenses and
making adjustments for the non-cash expenses. From the given details regarding the upgrade of
the technology and factory refurbishment it can be identified that the total cash flow after tax
amounted to $ 35,594,000 (Damodaran, 2016).
Payback period – payback period is the time taken by the project for recovering the amount
expensed as initial investment for the project. For computing the simple payback period cash
flow after taxes are taken into consideration. If the payback period is considered as the basis for
accepting any project, the project is accepted if the payback period is less than the useful life of

4ACCOUNTING AND FINANCE
the project. In the given scenario the useful life of the project is 10 years and the simple payback
of the project is 5.16 years. However, the discounted payback period is not applicable as the
project is not able to generate positive value over its useful life (Götze, Northcott & Schuster,
2015).
Net present value – NPV is used for determining current value of all the future cash flows that is
generated by a project and it includes the amount invested initially for acquiring the project. If
NPV is considered as the basis for accepting any project, the project is accepted if NPV is
positive (Qiu, Wang & Wang, 2015). Conversely, the project with negative NPV is rejected as it
will wash out the wealth of the shareholders rather than generating earning for them. Project with
negative NPV will not be able to recover the initial investment amount. In the given scenario the
computed NPV of the project is $ - 31,85,056.48 and hence, it is not acceptable (DeFusco et al.,
2015).
Profitability index – it is the financial tool that tells whether investment shall be rejected or
accepted. It is computed through using the concept of time value of money. If PI is considered as
the basis for accepting any project, the project is accepted if the PI is more than 1. PI lower than
1 indicates that the present value of the project is lower than initial investment. Hence, the
project with PI of less than 1 shall not be accepted. In the given scenario the computed PI of the
project is 0.82 and hence, it is not acceptable (Dhavale & Sarkis, 2018).
In addition to the above facts, the IRR of the project is 14.65% which is lower than the
required rate of return of 20%.
Conclusion and recommendation

5ACCOUNTING AND FINANCE
From the above it can be concluded that the project is not able to fulfil the criteria of
acceptability for all the aspects used for evaluating the project. Hence, it is recommended that the
management of Mars Australia and New Zealand shall not proceed with the proposed
refurbishment of the factory and upgrade of technology as it will not be able to generate value
for the company
Answer (iii)
(a) Evaluating 2 mutually exclusive project
Equivalent annual annuity (EAA) method can be used under capital budgeting for
comparing 2 mutually exclusive projects with unequal useful lives. It computes constant cash
flow generated by the project over the period of useful lives it was the annuity. Under this
approach the 1st step is to analyse the NPV of each project. After that the EAA of each project is
computed so that the PV of annuity is equal to NPV of the project. Finally EAA of each project
is compared to take the final decision and the project with highest EAA is selected (Shu,
Zeithammer & Payne, 2016).
(b) Selecting project that shall be accepted by the company
Hence, chocolate project shall be selected as it has higher equivalent annual annuity

6ACCOUNTING AND FINANCE

7ACCOUNTING AND FINANCE
Part B
Answer (a)(i)
The debt Cloudstreet will need to issue:
Answer (a)(ii)
Cost of debt for Cloudstreet:
Answer (b)(i)
The preference shares Cloudstreet will need to issue:
Answer (b)(ii)
Cost of preference shares for Cloudstreet:

8ACCOUNTING AND FINANCE
Answer (c)(i)
The ordinary shares Cloudstreet will need to issue:
Answer (c)(ii)
Cost of ordinary shares for Cloudstreet:
Answer (d)
Calculating the WACC:

9ACCOUNTING AND FINANCE
Answer (e)
Indicating how values of Cloudstreet will change with the decline in its overall WACC by 1%:
The decline in WACC by 1% will reduce the total cash outflows of Cloudstreet, which in
turn would increase the cash availability in the organisation. Moreover, the increment in total
cash would increase the firm value, as per the calculations conducted in FCFE approach.

10ACCOUNTING AND FINANCE
Reference
Chandra, P., (2017). Investment analysis and portfolio management. McGraw-Hill Education.
Damodaran, A., (2016). Damodaran on valuation: security analysis for investment and corporate
finance (Vol. 324). John Wiley & Sons.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. & Runkle, D.E., (2015). Quantitative
investment analysis. John Wiley & Sons.
Dhavale, D. G., & Sarkis, J., (2018). Stochastic internal rate of return on investments in
sustainable assets generating carbon credits. Computers & Operations Research, 89, 324-
336.
Götze, U., Northcott, D., & Schuster, P., (2015). Discounted Cash Flow Methods. In Investment
Appraisal (pp. 47-83). Springer, Berlin, Heidelberg.
Qiu, Y., Wang, Y. D., & Wang, J., (2015). Implied discount rate and payback threshold of
energy efficiency investment in the industrial sector. Applied Economics, 47(21), 2218-
2233.
Shu, S. B., Zeithammer, R., & Payne, J. W., (2016). Consumer preferences for annuity attributes:
Beyond net present value. Journal of Marketing Research, 53(2), 240-262.