Capital Budgeting Analysis for Apix's Diversification into Coffee Packaging Business

This presentation provides a capital budgeting analysis for Apix's potential diversification into coffee packaging business. It includes project estimated cash flow, NPV and IRR computation, and tendering recommendation. The analysis shows that the project would not be accepted due to negative NPV and lower IRR than the project cost of capital. The presentation also discusses potential useful information, techniques of capital budgeting, and risk methodologies.

FINANCE

Introduction
Apix considering diversification in business through
coffee packaging business
Decision to be taken if this is feasible or not
Steps Involved
 Determination of project cash flows after tax
 NPV & IRR computation
 Tendering recommendation

Project Estimated Cash Flow

Capital Budgeting Analysis

Issues regarding Information Availability
Summary of current analysis
 NPV = -$ 1 million
 IRR = 9.08%
Project would not be accepted
 NPV is negative
 IRR is lower than the project cost of capital (10%)
Even though decision can be made but the same is based
on assumptions and hence more information would be
desirable

Potential Useful Information
Equipment Salvage Value
Difference between book value and actual salvage
value in the terminal year
Risk Analysis related to capital budgeting
Inflation and the impact of the same on the project
(Sales and Expenses)

Techniques of Capital Budgeting
Determinant for decision making
 NPV
 IRR
Other uses of these determinants
 Choosing between mutually exclusive projects
 Ranking of projects with regards to financial feasibility
 Risk Analysis to determine the extend of risk
 Project financial feasibility
 Requisite information required is cost of capital and the
incremental post tax cash flows over project useful life

Risk Methodologies
Three major tools available for risk assessment
 Scenario Analysis – It considers the project feasibility first in different
scenarios such as optimistic, pessimistic before determining the project
feasibility by computing a weighted average NPV.
 Sensitivity Analysis – It helps in outlining the factors which can cause
maximum change in NPV and thereby these factors can be carefully
monitored.
 Real Options – This provide flexibility with regards to making decisions
regarding project closure and postponing even after initiation of project .
These are usually inserted in long term projects with high capital investment
and initial gestation period