Corporate Finance | Assignment | New

Running Head: CORPORATE FINANCE 1
CORPORATE FINANCE

CORPORATE FINANCE
Table of Contents
Question 3:..................................................................................................................................................3
Financial viability of the new plant.........................................................................................................3
Question 4:..................................................................................................................................................3
Sensitivity analysis..................................................................................................................................3

CORPORATE FINANCE
Question 3:
Financial viability of the new plant
Net present value which describes the difference between the present value of the cash
inflows as well as cash outflows. The present value indicates the amount of the dollars at present
more worthy than in comparison to the future value. Further, under the concept of capital
budgeting, internal rate of return and profitability index also plays a vital role. The internal rate
of return is the return at which the net present value of the project is equivalent to zero. The
profitability index is a measure of the profitability of the project in which the company wishes to
invest (Karpov & Shevchenko-Perepolkina, 2017).
As per the current case study, the three elements that are net present value, internal rate of
return and the profitability index has been used. After evaluating the project the results arrives
are as following.
The net present value tends to be $113180.13, the profitability index is 1.013 and the
internal rate of return is 12.14%. All these three figures imply that, the project is feasible and
suitable hence the company shall make investment in it. The positive net present value indicates
the value of the project to be higher at present time. The internal rate of return is higher than the
cost of capital and the profitability index is more than 1, and all of these three elements fall under
the category of the acceptance of the proposal (Iqbal, 2016).

CORPORATE FINANCE
Question 4:
Sensitivity analysis
In the particular case scenario, the change in the sales has been taken as one of the
factors, in change and fetches the variation in the result in the following manner as discussed
below. As per the sensitivity analysis it can be indicated that the increase and the decrease in the
growth rate of the sales, depicted different results. When the rate has been increased by 1%, than
the net present value tends to be positive at $3361115.64 and the internal rate of return also
increased to 12.40%. On the other hand, the net present value, when the growth rate decreases is
$(964547.96), followed by the internal rate of return at 11.88% which is lesser than the cost of
capital. The variation in the results is the clear cut impact of the change in the growth rate. This
also establishes the direct relationship between the net present value and growth rate. Higher the
growth rate, higher will be the net present value and vice versa. Hence, the growth plays a vital
role in deciding the annual cash flows (Marchioni & Magni, 2018).

CORPORATE FINANCE
References
Iqbal, M. M. (2016). Two Flaws of the Net Present Value Criterion. Journal of Business &
Economics, 8(1).
Karpov, V. A., & Shevchenko-Perepolkina, R. I. (2017). DOES THE INDICATOR OF NET
PRESENT VALUE SHOW THE ACTUAL EFFICIENCY OF PROJECTS?. tendencies
and prospects, 85.
Marchioni, A., & Magni, C. A. (2018). Investment decisions and sensitivity analysis: NPV-
consistency of rates of return. European Journal of Operational Research, 268(1), 361-
372.