ACC211: Booli Enterprise Manufacturing of Electronic Goods PDF 2023
Added on 2021-06-18
17 Pages3051 Words64 Views
Finance
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Business Finance1
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ContentsINTRODUCTION.................................................................................................................................3FINANCIAL VIABILITY OF THE PROJECT....................................................................................4Non-Discounted Pay-Back Period.....................................................................................................4Profitability Index..............................................................................................................................4Internal Rate of Return......................................................................................................................4Net Present Value..............................................................................................................................4SENSITIVITY ANALYSIS..................................................................................................................5Change in sales price.........................................................................................................................5Change in sales quantity....................................................................................................................5EFFECT OF LOSS OF SALE OF OTHER MODELS DUE TO NEW PROJECT...............................7CONCLUSION AND RECOMMENDATION.....................................................................................8Bibliography..........................................................................................................................................9Appendix.............................................................................................................................................102
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INTRODUCTIONIn the given scenario we see that the company Booli Ltd which has been involved in theproduction of electronic items wants to introduce in the market a new product. Introductionof a new project required detailed analysis and research on the same. [ CITATION Sea12 \l1033 ]We have implemented a few capital budgeting techniques for the said proposal in orderto evaluate the profitability of the same. Capital budgeting tool is a financial tool which helpsus evaluate the viability of an investment option. [ CITATION Ade15 \l 1033 ]This is based on lotof assumptions and rules. It is important that all these rules are kept in mind while implantingthis technique.3
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FINANCIAL VIABILITY OF THE PROJECTNon-Discounted Pay-Back PeriodPay-back period is the capital budgeting tool that helps the investor estimate the time periodin which he would recover the invested amount in a project[ CITATION Atk12 \l 1033 ]. Thecash flows generated from a project after the pay-back period contribute towards the profit ofthe investor.For the given case the pay-back period of the project is 2.02 years, with the project life of 5years. This means that the project will recover the initial investment amount within 2.02 yearsand any earning beyond this will be profit for the company.Profitability IndexProfitability index is the return ratio which provides the investor with an estimated amount ofreturn per unit of investment made by the investor. [ CITATION Ber09 \l 1033 ]The project ofBooli ltd has a Profitability index of 1.71 times. This indicates that the project will earn 1.71for every dollar invested. Since the amount earned is more than invested the project seemsviable.Internal Rate of ReturnInternal rate of return calculate the actual return earned on project based on the estimatedcash flows.[ CITATION Bie10 \l 1033 ] The internal rate of return of the for the project amountsto 37% percent, when the required rate of return for the project is 12%. Since the project isearning more than the expected rate the project seems financially viable.Net Present ValueNet present value is the sum total of present values of cash inflows and outflows.[ CITATIONDay08 \l 1033 ] Positive NPV indicates creation of value and negation indicates loss. For thegiven project for Booli ltd the Net present value amount to $40.2 million. Since the project isexpected to create value for the firm, it should be accepted.4
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