Comparing Two Investment Options

This assignment provides a comparative analysis of two investment options, A and B. The analysis uses Net Present Value (NPV) and Internal Rate of Return (IRR) to evaluate the profitability of each option. Option A has a higher NPV and IRR, indicating it is a better investment choice.

Finance Project Report

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Net present value-...................................................................................................................1
Internal rate of return (IRR)...................................................................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Capital budgeting is the process for planning the capital expenditure which the company has to pay for maximizing its
profitability in the long term. It addresses the issue regarding the strategic investment decisions in the long run. It can be defined as the
process of evaluating, deciding and analyzing the allocation of the resources with meeting the objective of optimum utilization of the
resources so that optimal capital structure can be attained. The Present study is based on the flighty airlines, an aircraft company that
has identified the requirement of the transport personnel and the smaller cargo from the Rock Bottom, a mining company
headquartered in South Africa. Furthermore, the report includes the evaluation of the net present value and the internal rate of return.
Net present value-
It is value of all the future cash flows over the whole life of investment discounted to the present value. It is stated as the
difference between the value of the cash inflows and present value of the cash outflows. It is the technique that is used in the capital
budgeting for analyzing the profitability of the investment or the project. It is the direct measure of contribution and increases the
wealth of the stakeholders as it reflects the monetary value (Net present value, 2019). This method takes into account all the cash
flows and considers the aspect of time value of money. It considers the risk contained in the future cash flows and facilitates the better
forecast. It is the best method for evaluating the capital budgeting. It helps the company in selecting the most suitable option among
the various projects options available. It bis easiest to interpret and understand (Angelo, Ayres and Stanfield, 2018). If the project
contains positive NPV, then the projects are acceptable while the projects are rejected when it generates negative NPV. It is the
standard method that evaluates the long term prospects of the projects in the capital budgeting. It assists the firm in measuring the
excess or the shortfall of the cash flows in terms of the present value. It provides for the ranking of the project so that best option can
be considered.
Option 1
Yea
r
Revenue from
cargo
Revenue from
flight
Total
revenu
Expenses Annual cost of
operation
Revenue –
expenses =
Resale
value
Net cash inflows
1

e cash inflow
2020 3306000 3010800
631680
0 13880000 254000 -7,817,200 -7,817,200
2021 3306000 3010800
631680
0 254000 6,062,800 6,062,800
2022 3306000 3010800
631680
0 254000 6,062,800 6,062,800
2023 3306000 3010800
631680
0 254000 6,062,800 6,062,800
2024 3306000 3010800
631680
0 254000 6,062,800
6,246,00
0 12,308,800
Year PV factors @ 23.1% Cash inflow (in $) Discounted cash flows (in $)
2020 0.812 -7,817,200 -6350284
2021 0.660 6,062,800 4000895
2022 0.536 6,062,800 3250118
2023 0.435 6,062,800 2640226
2024 0.354 12,308,800 4354371
Sum of discounted cash
flows 7895325
Less: initial investment 81000
NPV 7814325
Option 2
2

Year
Revenue
from
cargo
Revenue
from
flight
Total
revenue Expenses
Annual
cost of
operation
Revenue – expenses =
cash inflow
Resale
value
Net cash
inflows
2020 3306000 4617600 7923600 12650000 3740000 -8,466,400 -8,466,400
2021 3306000 3010800 6316800 3740000 2,576,800 2,576,800
2022 3306000 3010800 6316800 3740000 2,576,800 2,576,800
2023 3306000 3010800 6316800 3740000 2,576,800 2,576,800
2024 3306000 3010800 6316800 3740000 2,576,800 10,120,000 12,696,800
Year
PV
factors
@
23.1%
Cash
inflow (in
$)
Discounted
cash flows (in
$)
1 2020 0.812 -8,466,400 -6877660.439
2 2021 0.660 2,576,800 1700452.895
3 2022 0.536 2,576,800 1381358.973
4 2023 0.435 2,576,800 1122143.763
5 2024 0.354 12,696,800 4491630.415
Sum of
discounted
cash flows 1817925.61
Less:
initial
investment 830000
3

NPV 987925.6077
Interpretation: From the above computation it can be stated that Option A is much better than option B because higher net
present value has been evaluated from the project A. The company must select project A due to its low cost of investment with higher
value of earnings.
Internal rate of return (IRR)
It is the metric which is used to evaluate an estimation of the profitability of the investments in terms of percentage. It is the
discount rate that evaluates the net present value of the cash flows from a specific period. It is the value where the net present value
equates to the investment cost (de Souza Sampaio Filho, Vellasco and Tanscheit, 2018). Higher the internal rate of return indicates
that the more the better investment whereas lower internal rate of return reflects the lower return on the investments made.
Computation of IRR
Option 1
Year Figures (in $)
Initial investment -81000
2020 -7,817,200
2021 6,062,800
2022 6,062,800
2023 6,062,800
2024 12,308,800
Internal rate of return (IRR) 74%
Option 2
4

Year Figures (in $)
Initial
investment -830000
2020 -8,466,400
2021 2,576,800
2022 2,576,800
2023 2,576,800
2024 12,696,800
IRR 28%
From the above analysis it is interpreted that Option A considers as the better project in case of the internal rate of return in
comparison to the option B. Option A is better because it is generating higher rate of return that is equals to 74% but the project B is
facilitating only 28%.
CONCLUSION
By summing up this report, it has been concluded that business unit should lay focus on the option 1 over other. Moreover, both
NPV and IRR of option 1 is comparatively higher which in turn positively contributes in firm’s cash flow. It enables the organization
in leading towards the wealth maximization of the stakeholders by increasing the value of their shares in the overall market.
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REFERENCES
Books and Journals
Angelo, B., Ayres, D. and Stanfield, J., 2018. Power from the ground up: Using data analytics in capital budgeting. Journal of
Accounting Education. 42. pp.27-39.
de Souza Sampaio Filho, A. C., Vellasco, M. M. and Tanscheit, R., 2018, June. Modified Methods of Capital Budgeting Under
Uncertainties: An Approach Based on Fuzzy Numbers and Interval Arithmetic. In International Conference on Information
Processing and Management of Uncertainty in Knowledge-Based Systems (pp. 777-789). Springer, Cham.
Online
Net present value. 2019. [Online]. Available through: < https://cleartax.in/s/npv-net-present-value>.
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