(PDF) Case Examples of Project Evaluations
Added on 2021-05-31
6 Pages1278 Words54 Views
FINANCE
To: CEO, Pinto LimitedFrom: STUDENT’S NAMEDate: 18TH MAY, 2018Subject: Evaluation of introduction of new projectThis project is made in order to check the feasibility of the project with the help of capitalbudgeting technique. The projected cash flows are used to carry out capital budgeting.Base case analysis:We have used the data from the market research to perform the capital budgeting process andcalculate different metrics for the proposed project. This analysis will helps us to draw aconclusion whether to accept the project or reject it [ CITATION Ade15 \l 1033 ].ParticularsResultCommentNet presentvalue$5,605,816The present value of the future cash flows is calculatedthrough NPV. It can also be calculated by subtracting presentvalue of inflow from present value of outflow. The projectshould be accepted if the NPV is positive. If the PV of cashinflow exceeds the outflow then the project shall be accepted.In the given case, NPV is positive and higher and therefore,the project should be accepted.Pay-backperiod2.73 yearsIt is the time in which the investors recover the cost made asan investment. A lower pay back period is favourable. In thegive case, the payback period is 2.73 years whereas theinvestment period is 6 years. Therefore, the project should beaccepted.Discountedpay-backperiod3.38 yearsThis is more like the payback period, only the difference isthat the cash flows that are taken in this are discounted cashflows. This is slightly higher when compared to the paybackperiod. In the given case, the discounted payback period iscalculated as 3.38 years.ProfitabilityIndex1.31 timesProfitability index helps the investor to calculate theprofitability of the project on a single dollar invested. Theprofitability index is 1.31 times. This shows that the project
will earn $1.31 for every $1 invested.Internal Rateof return21.14%The IRR return helps us to determine the actual return on theinvestment. The IRR is compared to the required rate ofreturn and then the final decision is taken. If the IRR exceedsthe required rate of return then the proposal shall be accepted.In the given case IRR is 21.14% which is exceeding therequired rate of return.Uncertainty analysis:We extract a lot of data from the market and carry out research before accepting the neproject. However, complete data is not available and therefore, many assumption has to betaken. A detailed study and analysis is carried out[ CITATION Bie10 \l 1033 ]. The cash flows aswell as the discount rate are based on many assumptions and so it cannot be determinedeasily. We know that the economy and the market are dynamic in nature and a small changein the assumption might have a larger impact. Therefore, the capital budgeting process isconsidered to be a risky tool[ CITATION Day08 \l 1033 ].Sensitivity Analysis:Sensitivity analysis is involved in the process of capital budgeting which helps to know aboutthe sensitivity of the project when there is a change in any financial factor of the product. Inthe give case, the sensitivity analysis is carried out with respect to the change in units ofsales, price of the units and the change in working capital requirement[ CITATION Pet12 \l1033 ]. The graph shown below shows the sensitivity analysis with respect of the inputs that arementioned above:
End of preview
Want to access all the pages? Upload your documents or become a member.
Related Documents
Evaluation of new investment opportunitylg...
|6
|1345
|370
Assignment on Accounting and Finance (doc)lg...
|6
|1206
|31
Evaluation of New Proposal by Pinto Ltd. - Financial Analysislg...
|15
|3387
|89
Financial Management Principles and Applicationslg...
|7
|1108
|86
Finance Concepts (PDF)lg...
|10
|1525
|56
Capital Budgeting Techniques - Doclg...
|7
|1424
|115