Potentialities and Feasibilities Assignment

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

FINANCE1
MEMORANDUM
To : The CEO, Water Pty Ltd.
From : [Name, Designation]
Date : January 28, 2020
Subject : Project evaluation
This memorandum is prepared to analyze and explain the potentialities and feasibilities of
the proposed project of construction of ferry and its maintenance. Based on the revenue
assumptions and respective expenses, various capital budgeting and investment appraisal
techniques have been applies to evaluate the feasibility of the proposed project.
Gold Coast City Council has been assessed a need for construction of a ferry for
providing a shorter and convenient transportation facilities to the citizens of the city. The ferry
service will be provided at a cost to the citizens and it can become a source of revenue for the
Gold Coast City Council. Hence, before making investment in the project, its profitability,
feasibility and significance must be evaluated and assessed properly. In the following part of this
memorandum, the financial aspects of the project, such as investment needs, and expected
revenues arising from the project, have been analyzed and evaluated using various investment
appraisal techniques, such as net present value method, internal rate of return, profitability index
and accounting rate of return.
It has been assumed that the project will require and initial investment of $10 million and
it will generate annual revenue of $15 million with a 5% growth in revenue. On the other hand,
the will be a variable cost of $8 million with a growth of 4% in the annual variable costs.

FINANCE2
Considering a 7% weighted average cost of capital as the discounting rate following investment
appraisal techniques can be applied.
It can be observed that the project can generate a significant amount of positive cash
flows over the 7 years life of the project. If the free cash flows generated by the project are
discounted by the discounting factor at 7%, then the discounted cash flows are well enough to
recover the initial investment within 4 years. Using the free cash flows as computed above
following results can be arrived at for evaluation of the project.
Over the 7 years life of the project, the sum of discounted cash flows is considered as the
net present value of the project. It can be observed that the project is having a net present value
of $12.92 million. The acceptance criteria for the net present value is to select an invest
opportunity which is having a positive net present value. As the proposed project of the