Financial and Risk Analysis of Construction Project and Computation of NPV for Myer Holding

This report provides financial and risk analysis of the construction project and computation of NPV for Myer Holding. It includes project selection, cost management, funding, implementation and winding up. It also covers the computation of free cash flow and NPV in Australian Dollars (AUD) assuming the cost of capital is 5%.

Project analysis
Construction project analysis
Financial and risk analysis of the project
Name of the Author

Table of Contents
Part-A..........................................................................................................................................................1
Executive Summary.................................................................................................................................1
Project selection......................................................................................................................................1
Cost management-...................................................................................................................................1
Funding...................................................................................................................................................2
Implementation and winding up..............................................................................................................3
Recommendation.....................................................................................................................................3
Part-B..........................................................................................................................................................4
Introduction.................................................................................................................................................4
Answer to question no-1..........................................................................................................................4
Why companies raises equity capital...................................................................................................4
Dropped in Equity capital of Myer Holding..........................................................................................4
Reason of reduction in the overall total equity capital of Myer Holding.............................................5
Answer to question no-2..........................................................................................................................5
Computation of the free cash flow of the undertaken project............................................................5
Computation of NPV in Australian Dollars (AUD)................................................................................7
Canadian dollar depreciates..............................................................................................................10
Changes in NPV due to the changes in Canadian dollar to AUD........................................................13
Effect on the decision making............................................................................................................13
Based on the analysis you did in questions i-iv what would your advice be to the Myer board about
this project? Why?.............................................................................................................................13
Conclusion.................................................................................................................................................13
References.................................................................................................................................................14
1

Part-A
Executive Summary
With the ramified economic changes, each and every company wants to expand their
business on international level. It is observed that while selecting the project, every company
needs to analysis the available measures and resources, financial planning and operation
planning which need to be undertaken to implement the selected project. In this report, case
study analysis of the project of construction of the mall in Australia by the Fletcher Building
construction will be selected to determine whether it will be profitable for the company or not.
This report emphasis upon the case study analysis of the project section of construction of
the mall in Australia by the Fletcher Building construction in context with the cost management,
funding requirement and possible winding up situation that may lead to closure of the undertaken
project.
Project selection
With the ramified needs of the expansion of Fletcher Building construction, it needs to
undertake only those projects which has high viability of value creation in the invested amount
and could add value to organization. by using the capital budgeting tool, DU Pont analysis and
long term strategic planning, Fletcher Building construction could assess whether to select
particular project or not. The selection of the construction project is based on possible future
benefits and viability of the invested capital in the construction field. By using the construction
project, Fletcher could easily use its old assets and plants in the construction of the malls in
Australia. It could also easily export some of the imperative material for the constructions work
in Australia from its origin country (Fletcher Building Construction, 2016). However, joint
venture and strategic alliance would made to further expand the business in Australia (Alles,
Kogan, and Vasarhelyi, 2018).
Cost management-
Fletcher Building construction needs to use proper cost management which could be done
by installing the ABC model framework or life cycle costing method. The main role of cost
2

management is to avoid the unnecessary expenses and increased the overall return on capital
employed of the project undertaken by company. Fletcher Building construction should use the
proper costing method such as using ABC costing, Life cycle costing method and proper
recording of the data in the books of account are the some of the major tools. This cost
management is the most important tool which put control over the expenses and cash outflow in
the undertaken project. Company had to face the increased business cost due to the less effective
cost management tool. As per the work structure and undertaken project, Fletcher should have
undertaken the ABC costing model. This costing model assist in proper bifurcation of the cost in
the different work department of the organization which eventually reduces the overall costing
(Arens, Elder, and Mark, 2012).
Funding
In order to fund the new construction business, Fletcher Building construction could raise
funds by using the further public offer or debt funding. However, use of debt funding depends
upon the financial leverage of company. In this case, company should raise more funds from the
banks and financial institution by creating charge on its newly undertaken construction project.
Nonetheless, Company could use the below give funding structure to fund its new construction
project (Li, 2015).
Funding % of portion
Equity funding 30%
Debt funding 20%
Private funding or promoters funding 40%
Plugging back the retained earnings in project 10%
3

Implementation and winding up
The winding up is ideally the end steps when company finds difficulty to continue with
the undertaken project. The main issue associated with the commencing of the construction
project was related to the employees staff arrangement (Labour availability), lack of control of
management due to the non-effective strategic planning and proper deployment of funds. These
all these are very important to manage as these are the core aspects for the successful completion
of the project. The lack of r finance destructed the undertaken projects. On the other hand, due
to the lack of the human power, it was hard for company to efficiently working and create
synergy in its process work system. These all the factors resulted to the high cost of construction
and due to the high cash outflow as compared to the budgeted plan, company had to wind up its
construction project (Fletcher Building Construction, 2016). The project was ended due to the
lack of efficient working or strategic planning of the company. There were no environmental
issue which affected the project. However, company would have face the environmental issue if
it had gone through its internal work issues due the consistent changes in climate in Australia
(Warren, Reeve, and Duchac, 2013).
Recommendation
 Company should use proper financial tools such as capital budgeting, cost accounting, ratio
analysis to evaluate the viability of the project.
 There should be proper cost management tool such as ABC costing model, life cycle costing
model which could be used to reduce the overall costing of the business.
 Proper strategic planning and availability of the resources is must for the effective operation of
the undertaken project (Fletcher Building Construction, 2016).
4

Part-B
Introduction
It is analyzed that Myer has high financial leverage and also increased its overall equity capital in
2015 which might not be the good indicator for the future growth of the business.
Answer to question no-1
After analyzing the sources given, it could be inferred that Myer Holding has issued
equity capital of AUD $ 212 million in 2016 to its shareholders (Myer Holding Group, 2016).
Why companies raises equity capital
There are several benefits which occurs to company when they raises capital by issue of equity
capital in market such as increased brand image, raising funds for the business and lower down
the financial leverage. Myer holding has high financial leverage which could be reduced by issue
of more equity capital in business (Myer Holding Group, 2017).
Dropped in Equity capital of Myer Holding
Year 2014 2015 2016 2017
Common stock
(AUD $ in
million)
525 525 739 739
Other Equity
(AUD $ in
million)
(5) 5 (7) (5)
Retained
earnings (AUD
379 335 379 342
5

$ in million)
Accumulated
other comp..
(AUD $ in
million)
(1) (3) (4) (3)
Total equity
(AUD $ in
million)
893 863 1108 1073
(Yahoo finance, 2018).
Reason of reduction in the overall total equity capital of Myer Holding
The main reason of reduction in the overall total equity capital of Myer Holding is related to
decreased level of retained earnings. Company had to face high loss in its business through the
time which eventually impacted the retained earnings in long run (Myer Holding Group, 2015).
Answer to question no-2
Computation of the free cash flow of the undertaken project
Year
Particular 1 2 3 4 5
Total sales
$
5.50
$
5.61
$
5.72
$
5.84
$
5.95
(-) Variable Costs $ $ $ $ $
6

2.20 2.24 2.29 2.33 2.38
Contribution
$
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-) Fixed Cost
$
-
$
-
$
-
$
-
$
-
Net Profit
$
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-)Depreciation
$
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Net Profit before Tax
$
2.80
$
2.87
$
2.93
$
3.00
$
3.07
(-) Tax @40%
$
1.12
$
1.15
$
1.17
$
1.20
$
1.23
Net Profit after tax
$
1.68
$
1.72
$
1.76
$
1.80
$
1.84
(+) Depreciation
$
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Cash Inflows
$
2.18
$
2.22
$
2.26
$
2.30
$
2.34
7

(+) Salvage Value 9
Working Capital 2
Free Cash Flows in
Australian Dollars 2.18 2.22 2.26 2.30 13.34
The total free cash flow which Company would have would be $ 13.34 in all five years.
Computation of NPV in Australian Dollars (AUD)
Computation of NPV in Australian Dollars (AUD) for the project assuming the cost of capital is
5% (Myer Holding Group, 2017).
Year
Particular 1 2 3 4 5
Total sales
$
5.50
$
5.61
$
5.72
$
5.84
$
5.95
(-) Variable Costs
$
2.20
$
2.24
$
2.29
$
2.33
$
2.38
Contribution
$
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-) Fixed Cost $ $ $ $ $
8

- - - - -
Net Profit
$
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-)Depreciation
$
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Net Profit before Tax
$
2.80
$
2.87
$
2.93
$
3.00
$
3.07
(-) Tax @40%
$
1.12
$
1.15
$
1.17
$
1.20
$
1.23
Net Profit after tax
$
1.68
$
1.72
$
1.76
$
1.80
$
1.84
(+) Depreciation
$
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Cash Inflows
$
2.18
$
2.22
$
2.26
$
2.30
$
2.34
(+) Salvage Value 9
Working Capital 2
9

Free Cash Flows in
Australian Dollars 2.18 2.22 2.26 2.30 13.34
*Present value factor
@5% 0.952 0.907 0.864 0.823 0.784
Present Value
$
2.08
$
2.01
$
1.95
$
1.89
$
10.45
Total Present values(A)
$
18.39
(-)Cash Outflows
Initial investment
$
10.00
Working capital
investment
$
2.00
(+)Cost Of equipment
$
12.00
Total(B)
$
12.00
Net Present Value(A-
B)
$
6.39
10

Source: (Yahoo finance, 2018).
Canadian dollar depreciates
If Canadian dollar depreciates against the Australian dollar and it could buy only .95 Australian
dollar then the outcome would be
Year
Particular 1 2 3 4 5
Total sales
$
5.50
$
5.61
$
5.72
$
5.84
$
5.95
(-) Variable Costs
$
2.20
$
2.24
$
2.29
$
2.33
$
2.38
Contribution
$
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-) Fixed Cost
$
-
$
-
$
-
$
-
$
-
Net Profit
$
3.30
$
3.37
$
3.43
$
3.50
$
3.57
(-)Depreciation $ $ $ $ $
11

0.50 0.50 0.50 0.50 0.50
Net Profit before Tax
$
2.80
$
2.87
$
2.93
$
3.00
$
3.07
(-) Tax @40%
$
1.12
$
1.15
$
1.17
$
1.20
$
1.23
Net Profit after tax
$
1.68
$
1.72
$
1.76
$
1.80
$
1.84
(+) Depreciation
$
0.50
$
0.50
$
0.50
$
0.50
$
0.50
Cash Inflows
$
2.18
$
2.22
$
2.26
$
2.30
$
2.34
(+) Salvage Value 9
Working Capital 2
Free Cash Flows in
Australian Dollars 2.18 2.22 2.26 2.30 13.34
*Present value factor
@5% 0.952 0.907 0.864 0.823 0.784
Present Value $ $ $ $ $
12

2.08 2.01 1.95 1.89 10.45
Total Present values(A)
$
18.39
Canadian dollar to
AUD 0.95
Total present cash
inflow
$
17.47
(-)Cash Outflows
Initial investment
$
10.00
Working capital
investment
$
2.00
(+)Cost Of equipment
$
12.00
Total(B)
$
12.00
Canadian dollar to
AUD
$
11.40
13

Net Present Value(A-
B)
$
6.07
Changes in NPV due to the changes in Canadian dollar to AUD
It is analyzed that the NPV in this case will change to AUD $ 6.07 if there is changes in
Canadian dollar to AUD to .95 over the next five years. it will lower down the overall net present
value of the project (Warren, Reeve, and Duchac, 2013).
Effect on the decision making
In both cases, the net present value of the project is positive. However, it will lower down my
earning if the same amount is remitted to Australia. It will not affect my decision as in both
cases I am having positive net present value (Myer Holding Group, 2017).
Based on the analysis you did in questions i-iv what would your advice be to the Myer
board about this project? Why?
After analyzing this project, the main advice to Myer would be that it should accept this project.
It will not only add value to organization but also increased the inflow of cash for company in
near future. Therefore, it is advised to Myer to accept the new proposal to set up stores (Yahoo
finance, 2018),
Conclusion
This could be inferred that Myer Company could add value on its investment if it select the given
project. However, by using the given capital budgeting method, it could easily determine that it
would have positive cash inflow which will be more than its cash outflow.
14

References
Alles, M. G., Kogan, A., and Vasarhelyi, M. A. 2018. Feasibility and Economics of Continuous
Assurance 1. In Continuous Auditing: Theory and Application (pp. 149-167). Emerald
Publishing Limited.
Arens, A. A., Elder, R. J., and Mark, B. 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Fletcher Building Construction, (2016). Annual report. Available at
https://fletcherbuilding.com/investor-centre/financial-results/2017-annual-report/., ., , Accessed
on 14th May, 2018
Li, X., 2015. Accounting conservatism and the cost of capital: An international analysis. Journal
of Business Finance & Accounting, 42(5-6), pp.555-582.
Myer Holding (2015). Annual report. Available at http://investor.myer.com.au/Reports/?
page=Annual-Reports., , Accessed on 14th May, 2018
Myer Holding (2016). Annual report. Available at http://investor.myer.com.au/Reports/?
page=Annual-Reports., , Accessed on 14th May, 2018
Myer Holding (2017). Annual report. Available at http://investor.myer.com.au/Reports/?
page=Annual-Reports., Accessed on 14th May, 2018
Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage
Learning.
Yahoo finance, 2018 Available from https://in.finance.yahoo.com/, Accessed on 14th May, 2018
15