Computation of NPV of Both Projects and Analysis of Financial Health of Jay Traders

This document provides a detailed analysis of the computation of NPV of both projects and the financial health of Jay Traders. It includes tables, figures, and recommendations for decision-making.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Author’s Note

1
CORPORATE FINANCE
Table of Contents
Part 1................................................................................................................................................2
Computation of NPV of Both Projects........................................................................................2
Other Factors affecting the Decisions..........................................................................................5
Part 2................................................................................................................................................6
Analysis of Financial Health of Jay Traders................................................................................6
Decision Taken by the Bank........................................................................................................7
Capital Structure of Business.......................................................................................................8
Reference.........................................................................................................................................9

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CORPORATE FINANCE
Part 1
Computation of NPV of Both Projects
Old Machine New Machine
Particulars 0 1 2 3 4 5 0 1 2 3 4 5
Initial
Investment
$0.
00
-
$1,250
,000.0
0
Total Initial
Investment $0
-
$1,250
,000
Operating
Cash Flow:
Sales units
5000
00
5500
00
6000
00
7000
00
8500
00
6500
00
7200
00
8000
00
9300
00
1050
000
Sale price
per unit
$10.
50
$10.
50
$10.
50
$10.
50
$10.
50
$8.7
0
$8.7
0
$8.7
0
$8.7
0
$8.7
0
Total Sales
Revenue
$5,2
50,0
00
$5,7
75,0
00
$6,3
00,0
00
$7,3
50,0
00
$8,9
25,0
00
$5,6
55,0
00
$6,2
64,0
00
$6,9
60,0
00
$8,0
91,0
00
$9,1
35,0
00
Production
Units
5300
00
5300
00
6100
00
7200
00
8100
00
6800
00
7100
00
8300
00
9300
00
1000
000
Cost per
unit
$7.7
0
$7.7
0
$7.7
0
$7.7
0
$7.7
0
$6.3
0
$6.3
0
$6.3
0
$6.3
0
$6.3
0
Total Cost
of
Production
$4,0
81,0
00
$4,0
81,0
00
$4,6
97,0
00
$5,5
44,0
00
$6,2
37,0
00
$4,2
84,0
00
$4,4
73,0
00
$5,2
29,0
00
$5,8
59,0
00
$6,3
00,0
00
Net Profit
$1,1
69,0
00
$1,6
94,0
00
$1,6
03,0
00
$1,8
06,0
00
$2,6
88,0
00
$1,3
71,0
00
$1,7
91,0
00
$1,7
31,0
00
$2,2
32,0
00
$2,8
35,0
00
Income Tax
@ 30%
$350
,700
$508
,200
$480
,900
$541
,800
$806
,400
$411
,300
$537
,300
$519
,300
$669
,600
$850
,500
Net Profit
After Tax
$818
,300
$1,1
85,8
00
$1,1
22,1
00
$1,2
64,2
00
$1,8
81,6
00
$959
,700
$1,2
53,7
00
$1,2
11,7
00
$1,5
62,4
00
$1,9
84,5
00
Salvage
Value:
Salvage
Value
$35,
000
$22,
000
$170
,000
Income Tax
@ 30%
-
$10,
-
$6,6
-
$51,

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CORPORATE FINANCE
500 00 000
Net
Salvage
Value
$24,
500 $0 $0 $0
$15,
400 $0 $0 $0 $0 $0
$119
,000
Net Cash
Flow $0
$842
,800
$1,1
85,8
00
$1,1
22,1
00
$1,2
64,2
00
$1,8
97,0
00
-
$1,250
,000
$959
,700
$1,2
53,7
00
$1,2
11,7
00
$1,5
62,4
00
$2,1
03,5
00
Required
Rate of
Return
11.
00
%
11.0
0%
11.0
0%
11.0
0%
11.0
0%
11.0
0%
11.00
%
11.0
0%
11.0
0%
11.0
0%
11.0
0%
11.0
0%
Discounted
Cash Flow $0
$759
,279
$962
,422
$1,1
25,7
77
-
$1,250
,000
$864
,595
$1,0
17,5
31
$885
,985
$1,0
29,2
01
$1,2
48,3
25
Net
Present
Value $2,847,478 $3,795,636
Annual
Equivalen
t Cost $770,443 $1,026,987
Figure 1: (Table Showing NPV computation)
Source: (Created by the Author)
The above table shows the computation of Net Present value of the machinery which can
be used by the management of the company. The computation of NPV of the machinery is done
so that the management of the company can take appropriate decisions regarding a key part of
the business. As per the case which is provided the directors of Huanzoo LLC plc is considering
to make improvements in the operational structure of the business by introducing a new
machinery which would have a useful life of 5 years.
There is another option which is available to the management of the company to stay
with the old machinery as the same also has a useful life of 5 more years after which
replacements needs to be made. In order to consider which option is the best from the business
point of view, the management of the company has decided to apply investment appraisal

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techniques line NPV analysis (Dietz and Hepburn 2013). NPV analysis is applied by business
when they want to estimate the future estimate cash inflows from the project (Xiong and Zhang
2014). The method of NPV computation requires the costs of capital of the business which is the
required rate of return which is anticipated by the management of the company. In addition to
this, the future cash inflows from the use of machinery is also to be considered in the
computation of NPV of the machinery.
In the table which is shown above, the NPV of both the options are computed for making
comparisons as to which approach is better. The NPV is computed considering the year wise
production and sales which the management of the company anticipates to achieve. The analysis
is taken into consideration for a period of five years. The above table shows that NPV of new
machinery is much more than the old machinery which suggest that the new machinery would be
more profitable for the business (Zhou et al. 2015). The results show that by installing the new
machinery in the business the management would be able to boast the sales of the business. With
the new machinery, the management would be able to earn more profits as shown in the able
table. The number of units which is produced by the business enhances with the use of new
machinery and with reducing the price slightly, the management is also able to increase the sales
of the business (Žižlavský 2014). The use of new machine would help the business to enhance
the revenue which can be generated by the business. Therefore, the management should choose
replacing the old machinery with new machinery as the same would result in more profit
generation in the business. The new machinery would also improve the operational efficiency of
the business.

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Other Factors affecting the Decisions
There are other factors which needs to be considered while taking decisions for the
business on whether the management wants to replace the existing machinery with a new model
for the same. It is anticipated that the installation of new machine would enhance the
productivity of the business and thereby also enhance the revenue of the business. The
management of the company needs to consider the technological advancement in the market and
choose the best available machinery in the market so that the business is always up to date with
the level of technology in the market. In addition to this, the management also needs to consider
the level of market demand in the economy for the product which is offered by the business
(Baum and Crosby 2014). The demand for the products in the market is an important
consideration which needs to be considered by the management of the company for taking
important decisions. The management of Huanzoo LLC needs to also focus on the liquidity
requirements of the business and ensure that the business is able to meet the day to day expenses
of the business effectively (Aggarwal and Thakur 2013). The management also needs to select an
appropriate source of funds which could finance the requirement of the new machines and also
which could meet the financing requirements after the machine is set up. In addition to this, the
internal control of the business also needs to be strong so that employees are supervised and their
activities are well directed. In addition to this, there are legal factors and regulations which the
management of Huanzoo LLC must consider as such affect the decision-making process of the
business.

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Part 2
Analysis of Financial Health of Jay Traders
This part considers the financial health of Jay traders which is engaged in the business of
providing motor cars to the customers. The company operates as an East Coast dealer for a major
Japanese car manufacturer and the products which is offered by the business are also popular
among the consumers. The case shows that the company had started off the business incredibly
by importing cars from foreign manufacturers and then selling them to the local customers. The
case study shows that in the last quarter of 2009, the company made an earning before interest
and taxes (EBIT) of $290,000 a quarter and net profits of $170,000. The business of Jay traders
started facing problems from the year 2010 as there was a recession which led to a general
decline in auto sales, while the fall in the value of the dollar shaved profit margins for many
dealers in imported cars the business of Jay Traders faced the most difficulty. The period lasted
for 6 months during which time the management of Jay Traders had effectively cut down the
costs of the business and was able to make decent profits. However, one main thing which
caused concern for the management of the company was the high risks which was present in the
financial statements due to presence of high debt of the business (Scarborough 2016). The debt
capital was predominantly used by the business for financing the activities and operations of the
business. The main risks which is faced by the company is from excess debts of the business due
to which the total debt of the business has reached its limit of $10 million.
Therefore, in overall it can be said that the business of Jay Traders is performing well and
effectively maintaining the profitability of the business. However, the management needs to
focus on maintaining the liquidity situation in the business as lack of funds can harm the
operations of the business and thereby also affect the revenue generated by the business.

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Decision Taken by the Bank
As per the case study which is shown, the business of Jay traders effectively depends on
bank loans for financing the activities of the business and also meeting the current obligations of
the business. The management of Jay Traders has been so much depended on credit which is
provided by the bank that the total debts of the business have accumulated significantly over the
period and the same is shown to be $ 10 million as per the financial records of the business. The
credit which is provided to Jay Traders have reached a limit as per the opinion of the bank.
The case shows that the bank has decided to not allow any more credit facility to Jay
Traders as the debt which is already provided to Jay Traders is of lumpsum amount (Kodongo,
Mokoaleli-Mokoteli and Maina 2015). The argument of the bank is correct as the business has
not been generating extraordinary revenue of the business and there has been recession in the
business of automobiles and considering the same, the management of Jay Traders is not
performing up to the expectation of the business. The debt which is already taken by Jay Traders
is of lumpsum amount and the profits which is generated by the business are un appropriate in
nature. There is a risk in offering more credit to the business of Jay Traders as the would result in
enhancing the risks of the business more. Therefore, the reluctance of the bank to provide further
credits to Jay Traders is justified.
Capital Structure of Business
The capital structure of the business refers to the type of capital which is used by the
business of Jay Traders for meeting the day to day financing requirements of the business. An
ideal capital structure comprises of both equity and debt capital (Chechet and Olayiwola 2014).
The capital structure of the business should be created in such a way that a proper balance is

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attained which can reduce the risks of the business and also contribute to efficiency of the
business.
In the case of Jay Traders, the management of the company utilizes more of debt capital
for financing the requirements of the business and all the activities of the business. The
management of the company has taken around $ 10 million for financing the activities of the
business (Danis, Rettl and Whited 2014). The debt capital which is used by the business also
increases the level of risks which is associated with the business and therefore the management
needs to reduce the debt capital which is used by the business. The use of debts results in
leverage effect which boasts the business and thereby also increases the ability of the business to
generate profits of the business (Goyal 2013). The use debts also have another advantage which
is related to tax benefits as debts are deductible as per taxation rules in the country and thereby
the same can enhance the profit which is generated by the business. The management of Jay
Traders needs to reduce the debts of the business so that a balance can be achieved in the
business and the overall risks of the business needs to be reduced effectively.

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Reference
Aggarwal, A. and Thakur, G.S.M., 2013. Techniques of performance appraisal-a
review. International Journal of Engineering and Advanced Technology (IJEAT), 2(3), pp.617-
621.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Chechet, I.L. and Olayiwola, A.B., 2014. Capital structure and profitability of Nigerian quoted
firms: The agency cost theory perspective. American International Journal of Social
Science, 3(1), pp.139-158.
Danis, A., Rettl, D.A. and Whited, T.M., 2014. Refinancing, profitability, and capital
structure. Journal of Financial Economics, 114(3), pp.424-443.
Dietz, S. and Hepburn, C., 2013. Benefit–cost analysis of non-marginal climate and energy
projects. Energy Economics, 40, pp.61-71.
Goyal, A.M., 2013. Impact of capital structure on performance of listed public sector banks in
India. International Journal of Business and Management Invention, 2(10), pp.35-43.
Kodongo, O., Mokoaleli-Mokoteli, T. and Maina, L.N., 2015. Capital structure, profitability and
firm value: panel evidence of listed firms in Kenya. African Finance Journal, 17(1), pp.1-20.
Scarborough, N.M., 2016. Essentials of entrepreneurship and small business management.
Pearson.

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Xiong, W. and Zhang, X., 2014. Concession renegotiation models for projects developed through
public-private partnerships. Journal of construction engineering and management, 140(5),
p.04014008.
Zhou, C., Gong, Z., Hu, J., Cao, A. and Liang, H., 2015. A cost-benefit analysis of landfill
mining and material recycling in China. Waste management, 35, pp.191-198.
Žižlavský, O., 2014. Net present value approach: method for economic assessment of innovation
projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.