Financial Analysis

The objective of the presentation is to help the investment committee determine the best funding option for a project. Valuation methods, such as net present value and adjusted present value, are used. The presentation includes ratio analysis, project financials, calculations, project risks, and final recommendations.

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Financial Analysis

Executive Summary
The objective of presentation is to helping investment committee to determine
which option of funding should be chose by company in project. For this
purpose various kind of valuation methods are used such as net present
value, adjusted present value etc.

Rational of project
As per the current situation, there is project whose outlay is of 48 million and
debt capacity of 50%. As well as the company has 10 million retained
earnings. The company has two option in which first one is of right issue
whose cost is 2% of total amount raised. The second option is about debt
issue that occurs in 1% of total raised amount. Now the company's
investment committee wants to know that how much amount of total project
should be taken as debt.

Ratio analysis
There are majorly two types of ratios which are financial and non financial
ratios. Herein below some financial and non financial ratios are mentioned:
1. Financial ratios:

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Analysis- On the basis of above mentioned financial analysis this can be find
out that their net profit ratio is of 8% in year 2015 that raised 2016 that raised
and became of 8.03% while in next year, it decreased till 7.23%.
In addition, the current ratio was of 1.38:1 in 2015 that decreased and became
of 0.92 :1 which remain same in next two years.
2. Non financial ratio-
 Staff turn over ratio- This company's ratio is fluctuating in all three years. It
indicates that company's staff is rotating year by year which is a negative
aspect for company.
 Absenteeism ratio- Company's ratio is variable in three years time period. In
year 2015, this ratio was lower while in next two years this raised
continuously.

Project financials
 (a) Under adjusted present value- By using of this method, the value of
company's project is of -29355.77.
 (b) If purchasing of machine with 3 years 38 million on 12 % loan- In
this method, the value of project is of -16682.6108.
 (c) Under NPV model- By using of this method, the value of project is
estimated of -37056.31.

Calculations
 (a) Under adjusted present value
All figures in £'000 2019 2020 2021
Sales 7,500 8,700 9,000
COGS (2,140) (3,300) (3,280)
Gross Profit 5,360 5,400 5,720
Operating Expenses (648) (530) (610)
EBITDAa 4,712 4,870 5,110
Depreciation (12) (12) (12)
EBITa 4,700 4,858 5,098
Tax Expense (323) (353) (300)
EBIATa 4,377 4,505 4,798
CAPEXb 10 10 10
Investment in Working Capital 0 0 (5)
Free Cash Flow (FCF) 4367 4495 4793

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(b) If purchasing of machine with 3 years 38 million on 12 % loan:
Cost %
Debt 0.5 9.72 4.86
Equity 0.5 13.75 6.875
WACC 11.735
Year 0 1 2 3
FCF -38000 4367 4495 4793
Cost of capital 11.74%
Value of project -24213.6262
Debt amount 3800000.00%
Cost of debt 13.00%
Interest rate 0.12
Tax rate 0.19
PV of debt financing 7531.01538
Adjusted present value
of project -16682.6108

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 (c) Under NPV model:

Project risks
 Financial risk- As per the financial ratio analysis this can be find out that their
main risk is of lower profitability in recent year 2017. As well as in current
ratio analysis, their liquidity position is getting down. So these are some
financial risk.
 Non financial risk- The non financial risk to above company is of higher turn
over of employees and rate of absenteeism. Due to this companies' goodwill
at risk.

Critical discussion
 APV model- If company does not make invest in the project then this can be
beneficial for company this is so because as per this method the value of
project can be negative. Such as in first condition of 30% debt the estimated
value of project is of -29355.77 as well as in second situation the value is
negative.
 NPV model- Same as above model, taking decision of not to invest can be
beneficial because of negative value of project of -37056.31.

Final recommendations
On the basis of evaluation of project by use of method such as APV and
NPV, this is being recommend to investment committee that they should not
initiate the project. This is so because in each method, it is being evaluated
that project will be costly to company whether they take debt of 30 % or 50%
of total amount of project. Though, if it is necessary to company to invest in
project then they should chose the option of taking debt of 38 million on 12
% debt. It is so because in this method, company's project is less costly as
compare to other methods.