Corporate Finance Project Analysis

Verified

Added on  2020/06/05

|7
|1087
|46
AI Summary
This assignment delves into a corporate finance scenario involving two projects with provided cost, revenue, and cash flow data. Students are tasked with calculating key financial metrics such as Net Present Value (NPV), depreciation, profit before and after tax, and cash flow. They then analyze the results to determine whether management should exercise the projects based on NPV and provide a recommendation.

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.
Document Page
Corporate Finance

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
EXECUTIVE SUMMARY
Corporate finance is the process through which organization deals with its capital
structure so that funds can be utilized in areas from where maximum returns can be achieved. In
order to take various decisions regarding allocation of finance, management needs to do
evaluation of different options so that the best alternative is chosen (Serfling, 2014). For the
same, use of different tools can be done like weighted average cost which is given in the
following report that represents the overall cost of firm. Later, other methods like internal rate of
return are described in detail. Further, the report continued with recommendationd and
justifications regarding the implementation of different projects.
Document Page
TABLE OF CONTENTS
Executive summary..........................................................................................................................1
Q.1...............................................................................................................................................1
Q2................................................................................................................................................1
Q3................................................................................................................................................3
Q4 ...............................................................................................................................................3
REFERENCES................................................................................................................................4
Document Page
Q.1
WACC: It is said to be weighted average cost of capital which is used by the company to
calculated cost of capital in which every accumulation of capital is proportionally weighted. All
source of capital, that includes common stocks, preferred inventory, bonds and other long term
debts (Kim and Lu, 2013). It is typically a signal of higher risk which are associated with
company operations. Investors of the company need to involve extra return to assume additional
risk. It can also be used in order to determine the expected costs for all its accounting sources.
10.876 % is incurred from the mention case study.
WACC= Ke*Weighted Value + Kd*Weighted value of equity
Weighted equity+ Weighted debts
Ke=Rf+Beta (Rm-Rf)
=3+1.6(10-3) =14.2%
Kd = Interest rate (1-tax rate) = 3.12%
= 14.2*.7+3.12*.3 = 10.876%
.70+.30
Q2
1st Year 2nd 3rd Year 4th Year 5th Year
Sales 30000000 48000000 48000000 48000000 48000000
Less:
Operating costs (V.C) 12000000 16000000 16000000 16000000 16000000
Annual administration costs 4000000 4000000 4000000 4000000 4000000
Depreciation 1890000 1890000 1890000 1890000 1890000
Total costs 17890000 21890000 21890000 21890000 21890000
Profit before tax 12110000 26110000 26110000 26110000 26110000
Tax@22% 2664200 5744200 5744200 5744200 5744200
Profit after tax 9445800 20365800 20365800 20365800 20365800
Cash flow 11335800 22255800 22255800 22255800 22255800
P.V @10.876%
0.90190843
83
0.81343883
1
0.73364734
57
0.66168273
18
0.59677723
92
1

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
Present value
10223853.6
74375
18103731.9
348853
16327908.5
959858
14726278.5
417817
13281754.8
809316
DCF: In an accounting system, discounted cash flow analysis is a techniques of valuing a
project, a company, or those assets those are used under the concept of the time value of money.
All future cash flows are determine and discounted through using cost of capital to provide their
present value. It is that methods which is used to determine the investment opportunities. It is use
to analyse future free cash flow projections and that are estimated at a present value in order to
determine total investment of the cited company (Fracassi, 2016). Under this, NPV is -
15642917.89, hence, this project is not accepted because of negative NPV. While in IRR is that
return on which company makes its business decision to invest under this projects. After making
proper evaluation regarding the risks and return they are getting from the projects.
On the basis of both the discounted rate methods i.e. NPV and IRR help in company's
decision process. It is done to find out company financial capacity to generated profit for the
company. If they are going to use NPV which is showing negative results. It will not work for
the company for the making any profit in coming time. At the same time IRR is used to
identified total risk and return a company and investors are getting from the capital investment.
Total present value 72663527.62
Initial outflow= 12,000,000+7,500,000+60,000,000+10,000,000-1193554.48= 88306445.52
Net present value=88306445.52+72663527.62 = (15642917.89)
Internal rate of return is the return which is used by using trial and error method. This is
the situation where project net present value becomes zero (Flannery and Hankins, 2013). This is
the metric use in the capital budgeting which is used in order to measure the profitability of
potential investments. IRR is a discount rate that makes NPV of entire cash flows from specified
project which must be equal to zero. Under this project, the NPV becomes zero.
Q3
If Project starts after 12 months. Then, the project total capital would be 51558870.1727842.
And the project initial outflow was 88306445.52 hence the net present value would be -
36747575.3472158. This means that project should not be accepted.
2
Document Page
1st Year 2nd 3rd Year 4th Year 5th Year
Sales 0 48000000 48000000 48000000 48000000
Less:
Operating costs (V.C) 12000000 16000000 16000000 16000000 16000000
Annual administration costs 4000000 4000000 4000000 4000000 4000000
Depreciation 1890000 1890000 1890000 1890000 1890000
Total costs 17890000 21890000 21890000 21890000 21890000
Profit before tax -17890000 26110000 26110000 26110000 26110000
Tax@22% -3935800 5744200 5744200 5744200 5744200
Profit after tax -13954200 20365800 20365800 20365800 20365800
Cash flow -12064200 22255800 22255800 22255800 22255800
P.V @10.876%
0.90190843
83
0.81343883
1
0.73364734
57
0.66168273
18
0.59677723
92
Present value
-
10880803.7
808002
18103731.9
348853
16327908.5
959858
14726278.5
417817
13281754.8
809316
Q4
Under this given scenario, this has been seen that the management of company would not
exercise under both circumstances as both projects have negative NPV. Hence, these are not
going to be exercised by the firm.
3
Document Page
REFERENCES
Books and Journals
Flannery, M. J. and Hankins, K. W., 2013. Estimating dynamic panel models in corporate
finance. Journal of Corporate Finance. 19. pp.1-19.
Fracassi, C., 2016. Corporate finance policies and social networks. Management Science.
Serfling, M. A., 2014. CEO age and the riskiness of corporate policies. Journal of Corporate
Finance. 25. pp.251-273.
Kim, E. H. and Lu, Y., 2013. Corporate governance reforms around the world and cross-border
acquisitions. Journal of Corporate Finance. 22. pp.236-253.
4
1 out of 7
circle_padding
hide_on_mobile
zoom_out_icon
[object Object]

Your All-in-One AI-Powered Toolkit for Academic Success.

Available 24*7 on WhatsApp / Email

[object Object]