Assignment on Analysis of Feasibility of Proposed Investment

Assignment on Analysis of Feasibility of Proposed Investment Plan
Introduction
Hatfield Manufacturing System Plc, UK is a British company propose to expand its business
operations in Turkey. The company is an engineering firm which has specialisation in the
field of design, development and manufacture of additive layer manufacturing systems. The
company proposed to set up a new plant for the purpose of manufacturing the aforesaid
products in Turkey. The major business customer of the above products encompass aerospace
and motor vehicle industries. Since Turkey has a very competitive automotive industry,
setting up the unit in Turkey shall greatly help the company. The company wishes to
understand the following for the proposed Turkey Exapansion:
(a) Financial Viability of the project;
(b) Should they adopt foreign country or home country perspective;
(c) Does the project have any value addition to the company;
(d) Impact of foreign exchange volatility on value created by HMS;
(e) Method of financing the project
Analysis
Financial Viability of the project;
For analysing the feasibility of the project, capital budgeting has been considered as the most
appropriate tool with Net Present Value being the parameter tested. Net Present Value is
generally used to analyse the feasibility of the project by discounting the project inflows with
the weighted average cost of capital of the company. If the discounted inflow is greater than
discounted outflow, project is feasible. Further, the higher the Net Present Value, the better
the project shall be.
For computing the Net present Value of the project, the following facts have been taken into
consideration:
(a) Cost of Machinery purchased has been considered as upfront outflow of TL110 Mio;
(b) Depreciation of asset has been charged over 10 years based on straight line method;
(c) Revenue has been proposed to increase by 12% over year;
(d) Cost of production has been segregated in two categories Labour and other variable
cost where in labour cost increase by 2% year on year while other variable cost
increases by 1.5% on year on year basis;
(e) Fixed cost shall increase by 1%;
(f) Tax has been considered @19% on account of benefits of Double Taxation Avoidance
Agreement;
(g) Risk Premium has been assumed @ 5%;
(h) Cost of Debt has been considered @6%;
(i) Funding shall be procured in UK and shall be infused in equity;
Based on above facts, the feasibility analysis of the project has been conducted to determine
the net present value of the project under three proposed scenarios:
(a) When the project is financed by using debt in UK@ 6%;
(b) When project is financed by all equity by procuring funds through issue of equity;

(c) When project is financed through mix of debt and equity;
When the project is financed by using debt in UK@ 6%
If the project is financed using debt overall, the company present level of debt of Sterling
5000K shall increase by Sterling 12.46 Million, The said decision shall increase the debt level
of the company significantly. The feasibility of the plan under proposed financing shall be
very high as the cost of debt shall be low as compared to equity. Further, funding shall be
procured in the domestic market as compared to foreign market as the rate of interest is low
in the domestic market. However, one needs to consider the impact of foreign exchange
fluctuation while taking the concerned decision. Based on the concerned facts, the net present
value for an all debt capital structure has been computed here-in-below:
Year
Sl
No Particulars 0 1 2 3 4 5 6 7 8 9 10
1 Cost of machinery
-
1100000
00
2 Depreciation
-
110000
00
-
110000
00
-
110000
00
-
110000
00
-
110000
00
-
110000
00
-
110000
00
-
110000
00
-
110000
00
-
110000
00
3 Revenue
155180
00
173801
60
194657
79
218016
73
244178
73
273480
18
306297
80
343053
54
384219
97
430326
36
4
Variable Cost of
Production
Labour -513450 -523719
-
534193.
4
-
544877.
2
-
555774.
8
-
566890.
3
-
578228.
1
-
589792.
7
-
601588.
5
-
613620.
3
Other Variable Cost -953550
-
967853.
3 -982371
-
997106.
6
-
101206
3
-
102724
4
-
104265
3
-
105829
3
-
107416
7
-
109028
0
5 Fixed Cost -1144
-
1155.44
-
1166.99
4
-
1178.66
4
-
1190.45
1
-
1202.35
5
-
1214.37
9
-
1226.52
3
-
1238.78
8
-
1251.17
6
6 Profit Before Tax
304985
6
488743
2.3
694804
7.8
925851
0.2
118488
45
147526
81
180076
85
216560
42
257450
02
303274
85
7
Tax @19% (Being higher
for UK)
-
579472.
6
-
928612.
1
-
132012
9
-
175911
7
-
225128
1
-
280300
9
-
342146
0
-
411464
8
-
489155
0
-
576222
2
8 Profit after tax
-
1100000
00
247038
3.4
395882
0.2
562791
8.7
749939
3.2
959756
4.4
119496
72
145862
25
175413
94
208534
52
245652
63
9 Depreciation
110000
00
110000
00
110000
00
110000
00
110000
00
110000
00
110000
00
110000
00
110000
00
110000
00
10 Cash flow
-
1100000
00
134703
83
149588
20
166279
19
184993
93
205975
64
229496
72
255862
25
285413
94
318534
52
355652
63
11 Discounting Factor @6% 1
0.94339
62
0.88999
64
0.83961
93
0.79209
37
0.74725
82
0.70496
05
0.66505
71
0.62741
24
0.59189
85
0.55839
48
12 PV
-
1100000
00
127079
09
133132
97
139611
21
146532
52
153916
98
161786
13
170163
01
179072
24
188540
09
198594
57
13 NPV
4984288
1.4
Based on above simulation, the net present value of the above project has been computed at
49 Million approx. after considering the cost of capital. The resultant extra capital with the
company shall add value to financials and net profit of the company.
When the project is financed by using Equity
If the project is financed using equity overall, the company present level of equity of Sterling
83930K shall increase by Sterling 12.46 Million, The said decision shall increase the equity
level of the company significantly. The feasibility of the plan under proposed financing shall
be low as the cost of equity shall be high as compared to debt. Further, funding shall be
procured in the domestic market as compared to foreign market as the risk free rate of interest
is low in the domestic market. However, one needs to consider the impact of foreign
exchange fluctuation while taking the concerned decision. Based on the concerned facts, the
net present value for an all equity capital structure has been computed here-in-below: