Business Finance - Sample Assignment PDF

Running head: BUSINESS FINANCE
Business finance
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Introduction................................................................................................................................2
Answer 1 – Non-discounted payback period.............................................................................2
Answer 2 – profitability index...................................................................................................3
Answer 3 – internal rate of return..............................................................................................3
Answer 4 – net present value.....................................................................................................3
Answer 5 – Sensitivity analysis for price change......................................................................4
Answer 6 - Sensitivity analysis for price change.......................................................................6
Answer 7 – Conclusion..............................................................................................................8
Answer 8 – Recommendation....................................................................................................8
Reference....................................................................................................................................9

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Introduction
Booli Enterprise is an Australian based company located in Victoria and the company
is engaged in the manufacturing of electronic goods. Major revenue generating product of the
company is SSHA (smart speaker and home assistant). At present the company is selling one
model for SSHA and the sales from the model are excellent. However, technological changes
and limited features of the existing model the company is planning to launch new SSHA with
advanced features. The main objective of this report is to analyse the investment and
profitability for the new SSHA model. Techniques that will be used for analysing the project
are net present value, profitability index, discounted payback period and internal rate of
return. The report will also perform the analysis the sensitivity of selling price and selling
quantity on NPV of the project (Brooks 2015).
Answer 1 – Non-discounted payback period
Payback period measures the time required for covering up the amount of initial
investment for any project and the point after which the project will start earning profit.
However, the payback period is just concerned about the time required for covering up the
initial investment amount and does not give any importance on the project’s capability to earn
profit beyond the payback period (Pasqual, Padilla and Jadotte 2013).
Non-discounted payback period for the project –
Year Cash inflow Cumulative cash flow
0 $ (47,025,000.00)
1 $ 9,158,160.00 $ 9,158,160.00
2 $ 34,307,097.60 $ 43,465,257.60
3 $ 25,842,344.45 $ 69,307,602.05
4 $ 16,194,120.97 $ 85,501,723.02
5 $ 23,547,757.33 $ 109,049,480.35

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Non-discounted payback period = 2 + (47,025,000 – 43.465,257.60) / (69,307,602.05 –
43,465,257.60) = 2.14 years.
Answer 2 – profitability index
PI is the investment analysis tool that states whether the project shall be rejected or
accepted. It takes into consideration the time value of money (Leung et al. 2014). The
formula used for computing the PI is as follows –
PI = PV of future cash flows / Initial investment
PI = $ 77,573,881.43 / 47,025,000 = 1.65
Therefore the profitability index of the project is 1.65.
Answer 3 – internal rate of return
IRR is used under capital budgeting for projecting the expected profitability of any
project (Gallo 2014). It is a discount rate at which the net present value of the future cash
flows is equal to zero. IRR of the project for producing new SSHA model is 19.77%.
Answer 4 – net present value
NPV is the expected changes in the wealth of the investor taking into consideration
the time value factor of money. It is the difference between the net cash inflows from the
project and the initial investment required for the project. This method of analysing the
project is considered as most appropriate as it considers the time value of money through
using the discount rate. The NPV of the project for producing New SSHA model is $
30,548,881.43 (Leyman and Vanhoucke 2016).

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Answer 5 – Sensitivity analysis for price change
Sensitivity analysis is used to measure the changes in the expected variables and its
impact on the decision making procedure. While the sensitivity analysis is carried out
importance are given on the unfavourable circumstances. The most expected factors taken
into consideration in this project are the selling quantity and the selling price of the new
SSHA model. Impact of changes of these variables will be measured with respect to the net
present value of the project (DeFusco et al. 2015). The process of sensitivity analysis is
carried out as follows –
 In the 1st step the base output and base input for the project is recognized. In the given
scenario the base output is the NPV and the base input is selling price. Keeping other
factors like selling quantity, discount rate and initial investment constant, the
sensitivity of NPV with the changes in selling prices will be measured.
 Output value changes with the input value changes is computed
 Percentage change in output with percentage change in input is found out
 After performing the above steps the sensitivity of the output with regard to the input
is found out and the sensitivity is expressed in percentage form (McAuliffe 2015).
Price NPV Changes (Price) Changes (NPV)
$ -
500 $ (15,635,004.70)
530 $ (8,225,825.11) 30 $ 7,409,179.59
560 $ (816,645.51) 30 $ 7,409,179.59
590 $ 6,592,534.08 30 $ 7,409,179.59
620 $ 14,001,713.67 30 $ 7,409,179.59
650 $ 21,410,893.27 30 $ 7,409,179.59
680 $ 28,820,072.86 30 $ 7,409,179.59
710 $ 36,229,252.46 30 $ 7,409,179.59
740 $ 43,638,432.05 30 $ 7,409,179.59
770 $ 51,047,611.64 30 $ 7,409,179.59
800 $ 58,456,791.24 30 $ 7,409,179.59
830 $ 65,865,970.83 30 $ 7,409,179.59
860 $ 73,275,150.43 30 $ 7,409,179.59

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890 $ 80,684,330.02 30 $ 7,409,179.59
920 $ 88,093,509.61 30 $ 7,409,179.59
950 $ 95,502,689.21 30 $ 7,409,179.59
980 $ 102,911,868.80 30 $ 7,409,179.59
1010 $ 110,321,048.40 30 $ 7,409,179.59
1040 $ 117,730,227.99 30 $ 7,409,179.59
1070 $ 125,139,407.58 30 $ 7,409,179.59
1100 $ 132,548,587.18 30 $ 7,409,179.59
1130 $ 139,957,766.77 30 $ 7,409,179.59
1160 $ 147,366,946.37 30 $ 7,409,179.59
1190 $ 154,776,125.96 30 $ 7,409,179.59
1220 $ 162,185,305.55 30 $ 7,409,179.59
1250 $ 169,594,485.15 30 $ 7,409,179.59
1280 $ 177,003,664.74 30 $ 7,409,179.59
1310 $ 184,412,844.33 30 $ 7,409,179.59
400 500 600 700 800 900 1000 1100 1200 1300 1400
$(50,000,000.00)
$-
$50,000,000.00
$100,000,000.00
$150,000,000.00
$200,000,000.00
Selling price
N
P
V
Changes in price 4%
Changes in NPV 24%
Sensitivity
555.41
%
It is observed from the above presented table and graph that the output that is the NPV
changes positively with the changes in the input that is the selling prices. For the changes in
price ranged from $ 500 to $ 1310 the NPV ranged from -$15,635,004.70 to $
184,412,844.33. For every $ 30 increase in the input there is a change of $ 7,409,179.59 in

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the output. In other words, for every 4% changes in the selling price there is a 24% changes
in the NPV. The sensitivity is thus comes as 555.41%. Therefore, the NPV is highly sensitive
to the changes in the NPV (Baucells and Borgonovo 2013).
Answer 6 - Sensitivity analysis for price change
Various factors that lead to performing the sensitivity analysis are as follows –
 Most likely variables that have maximum impact on the decision making procedures
can be recognized through the sensitivity analysis
 It assists in taking the corrective actions or appropriate decisions after recognising the
impact of changes in the variables
While the sensitivity analysis is carried out with regard to the changes in the selling
quantity of the product and its impact on the project’s NPV, the output here is the NPV and
the input here is the selling quantity (Iooss and Lemaître 2015). In this part, the sensitivity
analysis will be carried out for changes in the selling quantity while keeping the other factors
like selling price, discount rate and initial investment constant.
Sales volume NPV Changes (Quantity) Changes (NPV)
$ -
25000 $ 22,354,148.82
50000 $ 25,411,884.87 25000 3,057,736.05
75000 $ 28,469,620.92 25000 3,057,736.05
100000 $ 31,527,356.97 25000 3,057,736.05
125000 $ 34,585,093.02 25000 3,057,736.05
150000 $ 37,642,829.07 25000 3,057,736.05
175000 $ 40,700,565.12 25000 3,057,736.05
200000 $ 43,758,301.17 25000 3,057,736.05
225000 $ 46,816,037.22 25000 3,057,736.05
250000 $ 49,873,773.27 25000 3,057,736.05
275000 $ 52,931,509.32 25000 3,057,736.05
300000 $ 55,989,245.37 25000 3,057,736.05
325000 $ 59,046,981.42 25000 3,057,736.05
350000 $ 62,104,717.47 25000 3,057,736.05

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0 50000 100000 150000 200000 250000 300000 350000 400000
$-
$10,000,000.00
$20,000,000.00
$30,000,000.00
$40,000,000.00
$50,000,000.00
$60,000,000.00
$70,000,000.00
Sales volume
N
P
V
Changes in quantity 27%
Changes in NPV 10%
Sensitivity 36.83%
It is observed from the above presented table and graph that the output that is the
NPV changes positively with the changes in the input that is the selling quantity. For the
changes in selling quantity ranged from 25000 to 350,000 the NPV ranged from
$22,354,148,82 to $ 62,104,717.47. For every 25000 increase in the input there is a change of
$ 30,57,736.05 in the output. In other words, for every 27% changes in the selling price there
is a 10% changes in the NPV. The sensitivity is thus comes as 36.83%. Therefore, the NPV is
moderately sensitive to the changes in the NPV (Butler et al. 2014).
Sensitivity analysis helps in taking appropriate decisions regarding the input and
output variables as it gives the insights regarding how the changes in input has it impact on
the output. Based on the result the analysts and the management can take appropriate
decisions (Baucells and Borgonovo 2013). However, sometimes the sensitivity analysis
seems ambiguous as the pessimistic level and optimistic level is depended on the user’s own

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approach. Further, it changes only one variable at a time keeping other variables constant.
However, in practical situation it may not be possible always (Levy 2015).
Answer 7 – Conclusion
It can be concluded from the above analysis that the New SSHA model shall be
produced by Booli Enterprise. The reason behind the acceptability of the project is that the
NPV of the project is $ 30,548,881.41, payback period is less than the projects useful life that
is 2.14 years, IRR of the project is higher than the required rate of return that is 19.77%.
Answer 8 – Recommendation
If it is found that producing of New model for SSHA will be made in exchange of loss
from other products, while calculating the NPV for new SSHA the amount of loss shall be
included in the initial investment. If after including the loss the new SSHA project’s NPV
comes positive then the project shall be accepted.

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Reference
Baucells, M. and Borgonovo, E., 2013. Invariant probabilistic sensitivity
analysis. Management Science, 59(11), pp.2536-2549.
Brooks, R., 2015. Financial management: core concepts. Pearson.
Butler, M.P., Reed, P.M., Fisher-Vanden, K., Keller, K. and Wagener, T., 2014. Identifying
parametric controls and dependencies in integrated assessment models using global
sensitivity analysis. Environmental modelling & software, 59, pp.10-29.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E.,
2015. Quantitative investment analysis. John Wiley & Sons.
Gorshkov, A.S., Rymkevich, P.P., Nemova, D.V. and Vatin, N.I., 2014. Method of
calculating the payback period of investment for renovation of building facades. Stroitel'stvo
Unikal'nyh Zdanij i Sooruzenij, (2), p.82.
Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach.
Routledge.
Iooss, B. and Lemaître, P., 2015. A review on global sensitivity analysis methods.
In Uncertainty management in simulation-optimization of complex systems (pp. 101-122).
Springer, Boston, MA.
Leung, B., Springborn, M.R., Turner, J.A. and Brockerhoff, E.G., 2014. Pathway‐level risk
analysis: the net present value of an invasive species policy in the US. Frontiers in Ecology
and the Environment, 12(5), pp.273-279.

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Leyman, P. and Vanhoucke, M., 2016. Payment models and net present value optimization
for resource-constrained project scheduling. Computers & Industrial Engineering, 91,
pp.139-153.
Pasqual, J., Padilla, E. and Jadotte, E., 2013. Equivalence of different profitability criteria
with the net present value. International Journal of Production Economics, 142(1), pp.205-
210.
Ross, S.A., Bianchi, R., Christensen, M., Drew, M., Westerfield, R. and Jordan, B.D.,
2014. Fundamentals of Corporate Finance: Introduction to corporate finance Chapter: 2
Financial statements, taxes and cash flow PART 2 Chapter: 3 Working with financial
statements Chapter: 4 Long-term financial planning and corporate growth PART 3 Chapter: 5
First principles of valuation: TVM Chapter: 6 Valuing shares and bonds PART 4 Chapter: 7
Net present value and other investment criteria Chapter: 8 Making capital investment
decisions Chapter: 9 Project analysis and evaluation PART 5 Chapter: 10 Lessons ....
McGraw-Hill Education (Australia).
Song, Z., Li, Z., Wei, M., Lai, F. and Bai, B., 2014. Sensitivity analysis of water-alternating-
CO2 flooding for enhanced oil recovery in high water cut oil reservoirs. Computers &
Fluids, 99, pp.93-103.