Analysis of Two Product Lines for Hitech Limited: A Capital Budgeting Approach

This assignment analyses two product lines under consideration for Hitech Limited using capital budgeting techniques. The analysis identifies the financial feasibility of the two projects and recommends the IQPOWER project over the Neuroforce project. The qualitative analysis reveals that the Neuroforce project would have detrimental effects on the health of the consumers in future, while the IQPOWER project is a safe traditional gaming console.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current assignment intends to analyse the two product lines under consideration for
Hitech Limited to be manufactured in future so that its ability to generate revenue increases
significantly. The analysis is carried out by using different techniques of capital budgeting,
which is utilised to identify the financial feasibility of the two projects. The NPV of the
Neuroforce project is found to be negative with increase in the discount rate. Therefore,
adequate analysis of both the projects has been conducted, which signifies that Hitech
Limited should undertake the IQPOWER project. On the other hand, the NPV of the
Neuroforce project is only positive when the discount rate is 16%, which has minimised its
financial feasibility. Furthermore, the conduction of qualitative analysis reveals the same
scenario. This is because the Neuroforce project would have detrimental effects on the health
of the consumers in future, while the IQPOWER project is a safe traditional gaming console.
By considering all aspects, it is recommended to the project manager of Hitech Limited to
undertake the IQPOWER project so that the return on investment of the organisation could be
maximised.

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Table of Contents
1. Introduction:...........................................................................................................................3
2. Findings:.................................................................................................................................3
2.1 Quantitative analysis:.......................................................................................................3
2.2 Qualitative analysis:.........................................................................................................5
3. Recommendation and justifications:......................................................................................6
4. Detailed comparison and further recommendations:.............................................................6
5. Conclusion:............................................................................................................................7
References and Bibliographies:..................................................................................................9
Appendix:.................................................................................................................................11

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1. Introduction:
The current assignment intends to analyse the two product lines under consideration
for Hitech Limited to be manufactured in future so that its ability to generate revenue
increases significantly. The analysis is carried out by using different techniques of capital
budgeting, which is utilised to identify the financial feasibility of the two projects. Moreover,
considerable assessment of the qualitative analysis has been carried out to identify social
feasibility so that the project could be approved. Hitech Limited is involved in manufacturing
gaming consoles, which could have both favourable and adverse effects on the minds of the
users raising the societal concerns of the project manager at the time of undertaking
investment decisions. The project manager has asked for appropriate recommendations
supported by justifications, as the individual is planning to undertake one of the two projects
for the organisation. Accordingly, recommendations have been provided so that the project
manager could undertake sound investment decision by considering quantitative analysis as
well as qualitative analysis.
2. Findings:
2.1 Quantitative analysis:
In terms of quantitative analysis, the capital budgeting techniques that have been used
for evaluating the viability of the two projects include net present value (NPV), internal rate
of return (IRR) and discounted payback period method. The detailed calculations of these
techniques are represented in the form of tables (Refer to Appendix). Based on the
calculations, it could be witnessed that the IQPOWER project is acceptable, since it adheres
to the requirements of the organisation. This is because as per the provided information, the
organisation requires a minimum of 5 years as discounted payback period for project

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acceptance. The discounted payback period of the Neuroforce project is 5.30 years, while for
the IQPOWER project, it is computed as 3.81 years. Hence, according to the criteria of
discounted payback period, Hitech Limited has to choose the IQPOWER project.
The other capital budgeting techniques like NPV and IRR have been computed for
analysis, which implies similar outcome as well. The IRR for the Neuroforce project is
calculated as 21.90%, while the same for the IQPOWER project is obtained as 24.59%. In
terms of NPV, the value is higher for the IQPOWER project as $6,567,322, while for the
Neuroforce project, it is $6,034,112. According to the principles of capital budgeting, the
project having the highest NPV is to be chosen by an organisation, since it analyses future
cash flows with the help of time value of money (Andor, Mohanty and Toth 2015). The
analysis of both the projects is made by using the discount rate of 16%, which needs the
selection of the IQPOWER project over the Neuroforce project. According to Bekaert and
Hodrick (2017), projects are assessed based on NPV, since it enables the organisation to
identify investment alternatives having the ability to increase the value of the firm in future.
For evaluating the projects, discount rate of 22% has been used as well for identifying
their overall feasibility. By applying the capital budgeting techniques with the stated discount
rate, the viability of the two projects is ascertained effectively. There would be no impact on
the net cash flows of the project, since there has been change in discount rate to 22% from
16%. Based on the outcomes, it could be seen that the NPV of the Neuroforce project has
declined massively to negative value making it financially unviable. Moreover, there has
been further increase in discounted payback period for the Neuroforce project to 7.57 years
and for the IQPOWER project, it is within the accepted criteria of 5 years. As argued by
Bosch-Badia, Montllor-Serrats and Tarrazon-Rodon (2014), the capital budgeting techniques
could provide incorrect information to the organisations in the absence of adequate research.

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Therefore, under two scenarios, it could be witnessed that the financial ability of the
IQPOWER project is more compared to that of the Neuroforce project. Based on the
valuation, it could be assessed that the capital budgeting methods emphasise on accepting the
IQPOWER project by considering NPV. There is no scope for accepting the Neuroforce
project, since it fails to comply with the business requirements of discounted payback period
under both scenarios. As mentioned by Daunfeldt and Hartwig (2014), capital budgeting
methods enable an organisation in analysing a project under present value, which clears the
investment prospects.
2.2 Qualitative analysis:
Qualitative analysis would assist the project manager of Hitech Limited to find out the
socially acceptable investment alternative, which would not have any adverse effect on the
brand image of the organisation. The analysis is conducted based on brand image along with
social commitments of Hitech Limited having no unfavourable impact on the minds of the
users. The qualitative analysis of the Neuroforce project is not sound to be undertaken owing
to the controversy about the long-term health hazard that could have adverse effects on the
health of the consumers. In addition, this project could be linked with human brain functions
having alternative flaws, as the health conscious groups are seen to be lobbying against the
game because of detrimental health effects. Moreover, there is scope for upgraded version of
safe gaming console compared to the Neuroforce project. Therefore, the demand for the
Neuroforce project would decline among the customers owing to adverse health effects
(Brigham and Daves 2014).
From the above discussion, it is clear that qualitative analysis implies ethical viability
at the time of undertaking significant investment decisions. Thus, it is apparent that the
IQPOWER project is deemed to be feasible over the Neuroforce project, since it does not
have detrimental effects on the health of the consumers.

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3. Recommendation and justifications:
After analysing quantitative and qualitative analyses for both the projects, it could be
found that investment in the IQPOWER project is more fruitful for the organisation in terms
of profitability rather than making investment in the Neuroforce project. Based on the
quantitative techniques, it could be witnessed that the NPV of the IQPOWER project is
higher in comparison to that of the Neuroforce project. Moreover, the IRR and discounted
payback period of the IQPOWER project reveals the same outcome denoting it as the most
viable investment alternative for Hitech Limited. In terms of qualitative analysis, the
IQPOWER project is more feasible as well, since it does not have detrimental impact on the
health of the consumers. Moreover, after the completion of seven years, it is estimated that
there would be more unfavourable effects of the Neuroforce project, which could have
harmful impact on the health of the customers, since the same could not be identified or
corrected at the current date.
4. Detailed comparison and further recommendations:
Neuroforce Project IQPOWER Project
This project is considered to be socially
detrimental
This project is deemed to be socially safe
Even though NPV is positive under the
discount rate of 16%, the same is negative
under 22%
NPV is higher than the Neuroforce project
under both discount rates
Discounted payback period is unacceptable Discounted payback period is within the
business requirements
There would be more detrimental effects on
the health of the consumers in future
This project is an upgraded version of a safe
traditional gaming console

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The above table mainly helps in representing the comparison of the two projects,
which denote that the IQPOWER project is more financially viable than the Neuroforce
project. The quantitative and qualitative analyses signify the fact that Hitech Limited could
undertake investment in the Neuroforce project. However, the investment on both projects is
to be carried out in varying timelines, since the Neuroforce project would be generated after
seven years, while there would be completion of the IQPOWER project after six years.
However, the Neuroforce project could not be accommodated owing to negative NPV in case
of 22% discount rate. Thus, investment in the IQPOWER project would lead to increased
profitability in future for Hitech Limited, which would assist in ensuring future growth of the
organisation. The organisation could undertake this project for maximising its overall return
on investment.
5. Conclusion:
Based on the above discussion, it could be stated that investing in the IQPOWER
project is socially as well as financially feasible for Hitech Limited. In addition, after the
calculations are validated, it could be identified that the rise in discount rate from 16% to
22% clearly represents the viability of the IQPOWER project over the Neuroforce project.
This is because the NPV of the Neuroforce project is found to be negative with increase in
the discount rate. Therefore, adequate analysis of both the projects has been conducted, which
signifies that Hitech Limited should undertake the IQPOWER project. On the other hand, the
NPV of the Neuroforce project is only positive when the discount rate is 16%, which has
minimised its financial feasibility. Furthermore, the conduction of qualitative analysis reveals
the same scenario. This is because the Neuroforce project would have detrimental effects on
the health of the consumers in future, while the IQPOWER project is a safe traditional
gaming console. By considering all aspects, it is recommended to the project manager of

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Hitech Limited to undertake the IQPOWER project so that the return on investment of the
organisation could be maximised.

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References and Bibliographies:
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of
Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge
University Press.
Bosch-Badia, M.T., Montllor-Serrats, J. and Tarrazon-Rodon, M.A., 2014. Capital budgeting
and shareholders’ value: Investment projects versus courses of action. The Engineering
Economist, 59(3), pp.207-230.
Brigham, E.F. and Daves, P.R., 2014. Intermediate financial management. Cengage
Learning.
Daunfeldt, S.O. and Hartwig, F., 2014. What determines the use of capital budgeting
methods?: Evidence from Swedish listed companies. Journal of Finance and
Economics, 2(4), pp.101-112.
De Andrés, P., De Fuente, G. and San Martín, P., 2015. Capital budgeting practices in
Spain. BRQ Business Research Quarterly, 18(1), pp.37-56.
Goel, S., 2015. Capital budgeting. Business Expert Press.
Johnson, N.B. and Pfeiffer, T., 2016. Capital budgeting and divisional performance
measurement. Foundations and Trends® in Accounting, 10(1), pp.1-100.
Kengatharan, L., 2016. Capital budgeting theory and practice: a review and agenda for future
research. Applied Economics and Finance, 3(2), pp.15-38.

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Mbabazize, P.M. and Daniel, T., 2014. Capital budgeting practices in developing countries: a
case of Rwanda. Res J Finance, 2(3), pp.42-48.
Nurullah, M. and Kengatharan, L., 2015. Capital budgeting practices: evidence from Sri
Lanka. Journal of Advances in Management Research, 12(1), pp.55-82.
Rossi, M., 2014. Capital budgeting in Europe: confronting theory with practice. International
Journal of Managerial and Financial Accounting, 6(4), pp.341-356.

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Appendix:
Excel spreadsheet displaying values for 16% cost of capital:
Neuroforce Project:-
IQPOWER Project:-
Excel spreadsheet displaying values for 22% cost of capital:

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Neuroforce Project:-
IQPOWER Project:-
Excel spreadsheet displaying Excel formulas for 16% cost of capital:
Neuroforce Project:-

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IQPOWER Project:-
Excel spreadsheet displaying Excel formulas for 16% cost of capital:
Neuroforce Project:-

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