This report provides a capital budgeting analysis for Saturn Petcare Ltd's new manufacturing unit for dog wet food products. It includes NPV, payback period, and profitability index analysis. It also considers scenarios of 5% higher and lower sales. Additionally, it provides an analysis of replacement options for the business.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
Running head: ACCOUNTING AND FINANCE Accounting and Finance Name of the Student: Name of the University: Author’s Note:
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
ACCOUNTING AND FINANCE Part A Capital Budgeting Analysis Particulars012345678910 Initial Investment: Construction on Manufacturing Unit-$20,000,000 Total Initial Investment-$20,000,000 Operational Cash Flow: Selling price Growth Rate2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35%2.35% MAC30% Sales Volume16000000160000001600000016000000160000001600000016000000160000001600000016000000 Selling Price per unit$1.25$1.28$1.31$1.34$1.37$1.40$1.44$1.47$1.51$1.54 Annual Sales$20,000,000$20,470,000$20,951,045$21,443,395$21,947,314$22,463,076$22,990,959$23,531,246$24,084,230$24,650,210 Raw Material & Packaging Cost-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000-$7,000,000 Fixed Conversion Costs-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000-$5,600,000 Variable Conversion Cost-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000-$1,400,000 Gross Profit$6,000,000$6,470,000$6,951,045$7,443,395$7,947,314$8,463,076$8,990,959$9,531,246$10,084,230$10,650,210 Depreciation on Plant-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000-$1,500,000 Net Profit before Tax$10,500,000$11,440,000$12,402,090$13,386,789$14,394,629$15,426,152$16,481,917$17,562,492$18,668,461$19,800,419 Less: Income Tax @ 30%-$3,150,000-$3,432,000-$3,720,627-$4,016,037-$4,318,389-$4,627,846-$4,944,575-$5,268,748-$5,600,538-$5,940,126 Net Profit after Tax$7,350,000$8,008,000$8,681,463$9,370,752$10,076,240$10,798,307$11,537,342$12,293,744$13,067,922$13,860,294 Add: Depreciation on Plant$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000$1,500,000 Salvage value of Manufacturing Facility$5,000,000 After-Tax Cash Flows$8,850,000$9,508,000$10,181,463$10,870,752$11,576,240$12,298,307$13,037,342$13,793,744$14,567,922$20,360,294 Net Cash Flow-$20,000,000$8,850,000$9,508,000$10,181,463$10,870,752$11,576,240$12,298,307$13,037,342$13,793,744$14,567,922$20,360,294 Cumulative Cash Flow-$20,000,000-$11,150,000-$1,642,000$8,539,463$19,410,215$30,986,455$43,284,762$56,322,104$70,115,849$84,683,771$105,044,065 Discount Rate20%20%20%20%20%20%20%20%20%20%20% Discounted Cash Flow-$20,000,000$7,375,000$6,602,778$5,892,050$5,242,454$4,652,231$4,118,678$3,638,483$3,207,984$2,823,361$3,288,301 Payback Period (in years)2.214 Net Present Value$26,841,320 Profitability Index2.342 Years Capital Budgeting Analysis:
ACCOUNTING AND FINANCE Scenario Summary Current Values:5% Higher Sales5% Lower Sales Changing Cells: Sales Volume160000001680000015200000 Fixed Conversion Cost-5600000-5600000-5600000 Result Cells: Payback Period2.2142.1312.306 Net Present Value$26,841,320$29,048,679$24,633,961 Profitability Index2.3422.4522.232 The management of Saturn Petcare ltd plansto implement a policy whereby the management can improve the sales of the business and thereby increase the revenue of the business. The management wants to introduce a new manufacturing unit which will be producing new dog wet food products. The sales volume which the management anticipates to produce on a yearly basis is around 16,000,000 cans for which the NPV, Payback period and Profitability Index of the project. The decision of the management is to be analyzed considering the investment appraisal techniques which are used by the business (Bianchini et al., 2016). The management will also be considering the what if situation wherein if the product is over produced by 5% or where the product is under produced by 5%. The total investment of the project is shown to be $ 20,000,000 and the net present value of the project under normal production conditions is $ 26,841,320 which is favorable and so is the profitability index and payback period analysis (Brewer & Stout, 2014). The NPV of the project under 5% less production capacity is shown to be $ 23,317,179 which is also shown to be favorable for the business during the period. The surplus production of the business in case of 5% more production is shown to be $ 30,365,462.
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
ACCOUNTING AND FINANCE The only concern for the business is the costs factor which is to be considered for the project and the same needs to be controlled by the management of the business during the period. Replacement Option YearOption AOption B 0-$475,000-$475,000 1$100,000$80,000 2$100,000$80,000 3$100,000$80,000 4$100,000$80,000 5$100,000$80,000 6$100,000$80,000 7$80,000 8$80,000 9$80,000 Risk Adjusted Rate6%6% Net Present Value$ 15,785.31$ 65,222.06
ACCOUNTING AND FINANCE YearCash OutflowCash InflowNet Cash FlowCash OutflowCash InflowNet Cash Flow 0-$475,000-$475,000-$475,000-$475,000 1$100,000$100,000$80,000$80,000 2$100,000$100,000$80,000$80,000 3$100,000$100,000$80,000$80,000 4$100,000$100,000$80,000$80,000 5$100,000$100,000$80,000$80,000 6-$475,000$100,000-$375,000$80,000$80,000 7$100,000$100,000$80,000$80,000 8$100,000$100,000$80,000$80,000 9$100,000$100,000-$475,000$80,000-$395,000 10$100,000$100,000$80,000$80,000 11$100,000$100,000$80,000$80,000 12-$475,000$100,000-$375,000$80,000$80,000 13$100,000$100,000$80,000$80,000 14$100,000$100,000$80,000$80,000 15$100,000$100,000$80,000$80,000 16$100,000$100,000$80,000$80,000 17$100,000$100,000$80,000$80,000 18$100,000$100,000$80,000$80,000 Risk Adjusted Rate6%6% Adjusted Net Present Value$ 34,758.15$ 103,826.89 Option AOption A The management of the business needs to select Option B for the purpose of replacement as the same option provides the business with maximum NPV which also signifies that Option B will be more profitable for the business.
ACCOUNTING AND FINANCE Reference Bianchini, A., Gambuti, M., Pellegrini, M., & Saccani, C. (2016). Performance analysis and economicassessmentofdifferentphotovoltaictechnologiesbased onexperimental measurements.Renewable Energy,85, 1-11. Brewer, P. C., & Stout, D. E. (2014). The future of accounting education: Addressing the competency crisis.Strategic Finance,96(2), 29.