Evaluation of Financial Analysis - PDF

RUNNING HEAD: FINANCE
FINANCE

FINANCE 1
PINTO LIMITED
16 May 2018
To: CEO
From: Operations Manager
Subject: Evaluation of Financial Analysis through NPV, IRR, PI, payback period and
Discounted Payback Period
INTRODUCTION
In this assignment, the Pinto Limited is undertaking a financial analysis of a
prospective project through Net present value method, Internal rate of return method,
Profitability index method, Payback period, Discounted pay back method. Further the results
of this assignment is ended with the recommendations.
Net Present Value Method (NPV)
Net present value is the investment appraisal method which defines the probable
returns from the investment. This is very easy in determining whether to put in the new
project if the NPV value is zero or more.
The Net present value is calculated by subtracting the initial investment cost from the
PV of cash inflows for the given 5-year period. The positive NPV represents that proposed
project produces returns while negative NPV represents that proposed project does not
produce returns and zero NPV signifies the indifferent position (Shapiro, 2005).
According to this case, Pinto limited considers the proposed project with the positive
NPV of $ 62,59,890.
Internal rate of return method (IRR)

FINANCE 2
This method is also an investment appraisal method. IRR is a discount rate which
presumes PV of Cash inflows are equal to PV of cash Initial project cost. In other words, it
means NPV is equal to zero. This method is also termed as time-adjusted rate of return
method (Bierman Jr and Smidt, 2012).
The proposed project should be accepted only when IRR > hurdle rate (Shapiro,
2005).
According to this case, Pinto limited considers the proposed project because IRR is
22.38% which is greater than minimum rate of return (i.e. 10%).
Profitability Index Method (PI)
PI is an investment appraisal method used by the business firms. This method links
between Initial project cost and the projected returns (Brooks and Mukherjee, 2010).
The profitability index (PI) is calculated by apportioning the PV of cash inflows by
the initial project cost of the proposed project. If the ratio is > 1, then the offer should be
accepted whereas if the ratio is < 1, then the offer should not be accepted but where the ratio
is 1, then it is considered as indifferent situation.
According to this case, Pinto limited considers the proposed project because PI is 1.35
which is more than 1.
Payback period Method
Payback period is an investment appraisal method used by the business firms. This
method is used to identify the time required to recover initial project cost from the produced
cash inflows (Brooks and Mukherjee, 2010).