Financial Analysis and Investment Appraisal

This assignment analyzes a proposed project for Bluegum Enterprise, which involves acquiring a cooling plant. It utilizes Net Present Value (NPV) calculations with different discount rates to determine the project's profitability. The analysis also considers ethical factors related to investment decisions and provides recommendations for capital structure based on a 0.5:1 ratio for debt-to-equity.

Accounting & Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Stating the extent to which company should consider ethical considerations in the capital
budgeting process........................................................................................................................3
PART B...........................................................................................................................................4
i and ii Calculating WACC..........................................................................................................4
iii. Recommending alternative capital structure which may result into lower cost of capital.....5
PART C...........................................................................................................................................5
a. Payback period.........................................................................................................................6
b. Discounted payback period......................................................................................................6
C. Determining net present value of project................................................................................7
d. Assessing profitability index of project...................................................................................8
e. Identifying the internal rate of return associated with the project...........................................8
f. Assessing the viability of project.............................................................................................9
g. Evaluating the viability of project when PV factor is 20%.....................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting is the main aspects of finance which in turn helps in presenting the fair view
of financials. In the dynamic business arena, it is highly difficult for the business entity to take
appropriate decision that aid in the growth and success of firm. Thus, by employing financial
tools and techniques manager of the business unit can select best proposals for the purpose of
investment. Besides this, capital structure which has setting down by the company also has direct
impact on its profitability aspect. In this, report will provide deeper insight about the debt-equity
which business unit should follow. Besides this, present report will also shed light on the manner
in which capital budgeting tools help in making viable and profitable decisions.
PART A
Stating the extent to which company should consider ethical considerations in the capital
budgeting process
Capital budgeting may be defined as a tool which in turn helps in evaluating the
profitability aspect that is associated with the proposed investment. Payback period, NPV and
IRR are the most effectual tools which in turn helps in identifying the extent to which specific
proposal will offer higher return to business entity. Business entity can build distinct image in
mind of target market only when they follow ethical aspects. Thus, at the time of making
selection of proposal manager of the company is required to consider ethical aspects and
considerations (Nicholson & Aman, 2012). By doing this, firm can build effectual image in the
mind of stakeholders and thereby would become able to enhance brand image. Thus, manager
should consider the aspect of environment sustainability while choosing one project out of
several. The rationale behind this, now individuals prefer to purchase products or services from
the business unit which follow ethical aspects. Thus, manager should not invest money in the
project which places bad impact on environmental aspects irrespective the aspect that project
offers high return. Hence, financial analyst and project manager of firm should consider the
aspects of environment sustainability while taking decision about investment.

PART B
i and ii Calculating WACC
Assumptions for CAPM
Particulars Figures
Ke (Cost of equity) 7.00%
Rf (Risk free rate of return) 3.0%
β 0.50
Rm (Return on market) 8%
Computation of Enterprise Value (EV)
Particulars Figures
MP (Current
Market Price) 0.031
Shares issued
during the period
109,67
7,419
MF (Market
value of the firm)
3,4
00,000
Loan: Long term
debt 218,586
Less: Cash &
Cash Equivalents 261,678
Enterprise
Value
3,3
56,908

Computation of debt-equity mix
Particulars Figures
Part of equity 93.96%
Proportion of debt 6.04%
Interest rate 12%
Tax rate 30%
WACC 7.08%
iii. Recommending alternative capital structure which may result into lower cost of capital
By doing investigation, it has been identified that Mediguard has raised more funds
through the means of equity rather than debt. It is good to the large extent because in the case of
equity shares firm pays dividend only when it earns enough amount of profit margin. In contrast
to this, under debt instruments firm is liable to make payment of interest whether it generates
profit or not. By considering all such aspects it is suggested to Medigard to undertake ideal
structure such as .5:1 while taking decision in relation to raising funds. On the basis of this
aspect, for developing optimal capital structure business entity should take resort of 1 debt
instrument in against to 2 equities (Brigham & Houston, 2011).
PART C
The given case presents that in the accounting year 2018, Bluegum Enterprise wishes to
acquire new cooling system with the initial outlay of $54200. In this, by undertaking investment
appraisal tools business entity can identify that project is financially viable or not.
a. Payback period
By doing analysis of payback period business entity can assess the time within which
amount of initial investment can be recovered (Investment appraisal techniques, 2017). Hence,

by making assessment of payback period business entity can make profit planning more
effectively and efficiently.
Year
Cash inflows (in
$) Cumulative cash inflow (in $)
1 20608 20608
2 20608 41216
3 20608 61824
4 20608 82432
5 33808 116240
Payback period: 2 + (54200 – 41216) / 20608
= 2.6 years
The above depicted table shows that Bluegum Enterprise will recoup the amount of initial
investment such as $54200 within the period of 2 years and 6 months. It shows that after such
time frame firm would become able to attain profit margin. Calculation shows that recovery
period is less as compared to the lifespan of project.
b. Discounted payback period
In this, discounted cash flows are considered by the business entity to determine the
period of recovery. On the basis of cited case situation, PV factor @ 15% is considered by the
manager of Bluegum enterprise to determine the period of recovery.
Year Discounted cash inflow Cumulative cash inflow
1 17920 17920
2 15582.6 33502.6
3 13550.1 47052.7
4 11782.7 58835.4
5 16808.6 75644
Payback period: 3 + (54200 – 47052.7) / 11782.7
= 3 + .6
= 3.6 years

By discounting all the cash flows @ 15% it has been assessed that business entity of
Bluegum enterprise has to wait for the period of 3 years and 6 months. In the remaining 1 year
and 6 months firm will generate profit margin.
C. Determining net present value of project
NPV is the most effectual investment appraisal method or tool which furnishes
information about the return that is associated with the specific proposal. Such tool helps in
taking suitable judgments by considering the time value of money concept (Obst, Graham, &
Christie, 2017). On the basis of standard criteria’s business entity should select project which has
higher NPV.
Calculation of NPV
Year Cash inflow
PV
facto
r @
15%
Discount
ed cash
inflow
1 20608 0.870 17920
2 20608 0.756 15582.6
3 20608 0.658 13550.1
4 20608 0.572 11782.7
5 33808 0.497 16808.6
Total
discounte
d cash
inflow 75643.9
Initial
investme
nt 54200
NPV
(Total
discounte
d cash
inflow –
initial
investme
nt) 21443.9
Outcome of investment appraisal tool shows that Bluegum Enterprise will generate
$21443.9 by investing $54200 in the project. Hence, owner of the company will earn positive
and higher return by investing money in such proposal.

d. Assessing profitability index of project
Profitability index can be assessed by the analysts by using the below mentioned
formula:
Profitability index: NPV + initial investment / initial investment
= (21443.9 + 54200) / 54200
= 75643.9 / 54200
= 1.39
From analysis, it has been assessed that profitability index of proposed investment is 1.39
which is higher than 1. Such aspect entails that higher margin or profitability is associated with
such investment proposal.
e. Identifying the internal rate of return associated with the project
IRR presents the return in terms of percentage which business entity will earn from
specific proposal. This method provides solution by employing the concept of time value of
money. In this, analyst identifies return related to project by taking into account two discounting
factors (Davies & Crawford, 2011). Hence, company should invest money in the project which
has higher IRR over others.
Year -54200
1 20608
2 20608
3 20608
4 20608
5 33808
IRR 30%

By applying the tool of investment appraisal it has been identified that IRR of project is
30% significantly. Thus, it can be stated that monetary returns which are associated with the
project is neither too higher nor too lower.
f. Assessing the viability of project
From overall evaluation and analysis, it is recommended to Bluegum enterprise to invest
money in the project related to the acquisition of new cooling system. Moreover, payback period
is half of the lifespan of project (Brealey, 2012). Besides this, NPV and IRR of such project is
positive and accounts for $21443.9 & 30% respectively. Further, profitability index also crossed
standard limit or criteria such as 1. Thus, outcome of all the tools clearly indicate that firm
should invest money in such proposed investment. By funding such project business entity will
get the desired level of outcome or success.
g. Evaluating the viability of project when PV factor is 20%
Cited case situation entails that when PV factor increases from 15% to 20% then business
organization namely Bluegum Enterprise will generate positive returns. In this case firm will get
$12735.5 which is greater than the initial investment. Hence, Bluegum Enterprise can also ace pt
such proposal when PV factor is 20%. By keeping in mind overall evaluation it can be presented
that project pertaining to acquisition will aid in the growth and success aspect of firm.
Net present value
Year Cash inflow PV factor @ 15%
Discounte
d cash
inflow
1 20608 0.833 17173.3
2 20608 0.694 14311.1
3 20608 0.579 11925.9
4 20608 0.482 9938.27
5 33808 0.402 13586.7
TDCF 66935.3
II 54200
NPV
(TDCF
– II) 12735.3

CONCLUSION
From the above report, it has been concluded that by following ethical aspects business
entity can employ money in suitable proposal. Besides this, it can be inferred that Bluegum
Enterprise should focus on acquiring the cooling plant. This in turn proves to be beneficial for
the firm in both financial and non-financial terms. Further, Medigard should follow the ratio
of .5:1 while determining the capital structure. By following such aspect, firm can control on cost
level and thereby would become able to attain high profit margin.

REFERENCES
Books and Journals
Brealey, R.A., 2012. Principles of corporate finance. Tata McGraw-Hill Education.
Brigham, E., & Houston, J., 2011. Fundamentals of financial management. Cengage Learning.\
Davies, T., & Crawford, I., 2011. Business accounting and finance. Pearson.
Nicholson, B., & Aman, A., 2012. Managing attrition in offshore finance and accounting
outsourcing: Exploring the interplay of competing institutional logics. Strategic
Outsourcing: An International Journal. 5(3). pp 232 - 247.
Obst, J. W., Graham, R., & Christie, G., 2017. Financial Management for Agribusiness.
Landlinks Press.
Online
Investment appraisal techniques. 2017. Online. Available through: <
http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Basic%20investment
%20appraisal%20techniques.aspx >. [Accessed on 5th May 2017].