Financial Analysis of Investment Project and Capital Structure of AMP Limited

This report provides a financial analysis of an investment project and the capital structure of AMP Limited. It includes after-tax cash flows, payback period, net present value, and profitability index.

Accounting and finance

TABLE OF CONTENTS
Part A.........................................................................................................................................3
(i)............................................................................................................................................3
(ii)...........................................................................................................................................5
A.........................................................................................................................................5
B.........................................................................................................................................6
C.........................................................................................................................................7
(iii)..........................................................................................................................................7
Option A.............................................................................................................................7
Option B.............................................................................................................................8
Part B........................................................................................................................................10
Executive summary..............................................................................................................10
Introduction..........................................................................................................................10
Comparative analysis of WAACC and capital structure..................................................10
Financial analysis of AMP Limited.................................................................................12
Major changes held in the capital structure of AMP limited in past three years.............13
AMP Limited’s Risk analysis..........................................................................................14
Conclusion............................................................................................................................15
References................................................................................................................................16

PART A
(i)
After-tax cash flows
Statement Showing After-tax Cash Flows for the proposed Investment project
Amount in million
Particulars/
Years 1 2 3 4 5 6 7 8 9 10
Sales in units 16.00 16.00 16.00 16.00 16.00 16.00 16.00 16.00 16.00 16.00
Sales Price per
Unit 1.25 1.28 1.31 1.34 1.37 1.40 1.44 1.47 1.51 1.54
Total Sales $20.00 $20.47 $20.95 $21.44 $21.9
5 $22.46 $22.99 $23.53 $24.08 $24.65
Raw Material
cost $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00 $7.00
Fixed Cost $ 5.60 $5.60 $5.60 $5.60 $5.60 $5.60 $5.60 $5.60 $5.60 $5.60
Variable Cost $ 1.40 $1.40 $1.40 $1.40 $1.40 $1.40 $1.40 $1.40 $1.40 $1.40
Gross Profit $ 6.00 $6.47 $6.95 $7.44 $7.95 $8.46 $8.99 $9.53 $10.08 $10.65
Depreciation $ 1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95
Profit Before
Tax $ 4.05 $4.52 $5.00 $5.49 $6.00 $6.51 $7.04 $7.58 $8.13 $8.70
Tax (rate 30%) $ 1.22 $1.36 $1.50 $1.65 $1.80 $1.95 $2.11 $2.27 $2.44 $2.61
Profit After Tax $ 2.84 $3.16 $3.50 $3.85 $4.20 $4.56 $4.93 $5.31 $5.69 $6.09
Depreciation $ 1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95 $1.95
Cash flow from
Salvage Value $ - $- $ - $ - $ - $ - $ - $ - $ - $5.00
Cash Flows after
Tax $ 4.79 $5.11 $5.45 $5.80 $6.15 $6.51 $6.88 $7.26 $7.64 $13.04
Payback period
Formula
last year with negative cumulative cash flow+
(absolute value of cumulative cash flow at the end
year with a negative cumulative cash flow / total
cash flow during the yearafter a negative
cumulative cash flow
Payback Period = 3 + (4.65) / 5.80
3.8017241

Table 1: Statement showing cumulative cash flow
Computation of Payback Period
Years Cash Flows (In Million ) Cumulative Cash Flow(In Million )
0 $ (20.00) $ (20.00)
1 $ 4.79 $ (15.22)
2 $ 5.11 $ (10.10)
3 $ 5.45 $ (4.65)
4 $ 5.80 $ 1.15
5 $ 6.15 $ 7.29
6 $ 6.51 $ 13.80
7 $ 6.88 $ 20.68
8 $ 7.26 $ 27.94
9 $ 7.64 $ 35.58
10 $ 13.04 $ 48.62
Net present value
Amount in million
Particulars/ Years 1 2 3 4 5 6 7 8 9 10
Cash Flows after Tax $ 4.79 $5.11 $5.4
5
$5.8
0
$6.1
5
$6.5
1
$6.8
8
$7.2
6 $7.64 $13.04
Present Value Factor @
20% 0.833 0.694 0.579 0.482 0.40
2 0.335 0.279 0.233 0.194 0.162
Present Value of Cash
Flows $3.99 $3.55 $3.1
5
$2.7
9
$2.4
7
$2.1
8
$1.9
2
$1.6
9 $1.48 $2.11
Total Present Value of
Cash Flows $25.33
Initial Capital Outlay $20.00
Net Present Value $5.33
Profitability index
Profitability Index Present Value of Cash Inflows / Initial investment

25.33/20.00
1.267
(ii)
A
After tax cash flows
Years/
Particulars 1 2 3 4 5 6 7 8 9 10
Sales in units 16.80 16.80 16.80 16.80 16.8
0 16.80 16.80 16.80 16.80 16.80
Sales Price
per Unit $1.25 $1.28 $1.31 $1.34 $1.3
7 $1.40 $1.44 $1.47 $1.51 $1.54
Total Sales $21.0
0 $21.49 $22.0
0
$22.5
2
$23.
04
$23.5
9
$24.1
4
$24.7
1
$25.2
9
$25.8
8
Raw Material
cost $7.07 $7.07 $7.07 $7.07 $7.0
7 $7.07 $7.07 $7.07 $7.07 $7.07
Fixed Cost $5.60 $5.60 $5.60 $5.60 $5.6
0 $5.60 $5.60 $5.60 $5.60 $5.60
Variable
Cost $1.47 $1.47 $1.47 $1.47 $1.4
7 $1.47 $1.47 $1.47 $1.47 $1.47
Gross Profit $6.86 $7.35 $7.86 $8.38 $8.9
0 $9.45 $10.0
0
$10.5
7
$11.1
5
$11.7
4
Depreciation $1.95 $1.95 $1.95 $1.95 $1.9
5 $1.95 $1.95 $1.95 $1.95 $1.95
Profit Before
Tax $4.91 $5.40 $5.91 $6.43 $6.9
5 $7.50 $8.05 $8.62 $9.20 $9.79
Tax (rate
30%) $1.47 $1.62 $1.77 $1.93 $2.0
9 $2.25 $2.42 $2.59 $2.76 $2.94
Profit After
Tax $3.44 $3.78 $4.14 $4.50 $4.8
7 $5.25 $5.64 $6.03 $6.44 $6.85
Depreciation $1.95 $1.95 $1.95 $1.95 $1.9
5 $1.95 $1.95 $1.95 $1.95 $1.95
Cash flow
fromSalvage
Value
$- $- $- $- $- $- $- $- $- $5.00
Cash Flows
after Tax $5.39 $5.73 $6.09 $6.45 $6.8
2 $7.20 $7.59 $7.98 $8.39 $13.8
0
Net present value

Amount in million
Years/
Particulars/ 1 2 3 4 5 6 7 8 9 10
Cash Flows
after Tax $5.39 $5.73 $6.09 $6.45 $6.82 $7.20 $7.59 $7.98 $8.39 $13.8
0
Present
Value Factor
@ 20%
0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
Present
Value of
Cash Flows
$4.49 $3.98 $3.52 $3.11 $2.74 $2.41 $2.12 $1.86 $1.63 $2.23
Total Present Value of Cash Flows $28.08
Initial Capital Outlay $20.00
Net Present Value $8.08
B
After tax cash flows
Particulars/
years 1 2 3 4 5 6 7 8 9 10
Sales in
units 15.20 15.20 15.20 15.20 15.2
0
15.2
0
15.2
0
15.
20 15.20 15.20
Sales Price
per Unit
$
1.25 $1.28 $1.31 $1.34 $1.3
7
$1.4
0
$1.4
4
$1.
47 $1.51 $1.54
Total Sales
$19.0
0
$19.4
5
$
19.90
$
20.37
$
20.8
5
$
21.3
4
$
21.8
4
$
22.
35
$
22.88
$
23.42
Raw
Material
cost
$
6.93 $6.93 $6.93 $6.93 $6.9
3
$6.9
3
$6.9
3
$6.
93 $6.93 $6.93
Fixed
Cost
$
5.60 $5.60 $5.60 $5.60 $5.6
0
$5.6
0
$5.6
0
$5.
60 $5.60 $5.60
Variable
Cost
$
1.33 $1.33 $1.33 $1.33 $1.3
3
$1.3
3
$1.3
3
$1.
33 $1.33 $1.33
Gross
Profit
$
5.14 $5.59 $6.04 $6.51 $6.9
9
$7.4
8
$7.9
8
$8.
49 $9.02 $9.56
Depreciati
on
$
1.95 $1.95 $1.95 $1.95 $1.9
5
$1.9
5
$1.9
5
$1.
95 $1.95 $1.95
Profit
Before
Tax
$
3.19 $3.64 $4.09 $4.56 $5.0
4
$5.5
3
$6.0
3
$6.
54 $7.07 $7.61
Tax (rate
30%)
$
0.96 $1.09 $1.23 $1.37 $1.5
1
$1.6
6
$1.8
1
$1.
96 $2.12 $2.28
Profit
After Tax
$
2.23 $2.55 $2.87 $3.19 $3.5
3
$3.8
7
$4.2
2
$4.
58 $4.95 $5.33
Depreciati $ $1.95 $1.95 $1.95 $1.9 $1.9 $1.9 $1. $1.95 $1.95

on 1.95 5 5 5 95
Cash flow
fromSalva
ge Value
$ - $ - $ - $ - $ - $ - $ - $ - $ - $5.00
Cash
Flows
after Tax
$
4.18 $4.50 $4.82 $5.14 $5.4
8
$5.8
2
$6.1
7
$6.
53 $6.90 $
12.28
Net present value
Particulars/
years 1 2 3 4 5 6 7 8 9 10
Cash Flows
after Tax $4.18 $4.5
0
$4.8
2
$
5.14
$
5.48
$
5.82
$
6.17
$
6.53 $ 6.90 $12.28
Present Value
Factor @
20%
0.833 0.694 0.579 0.482 0.40
2 0.335 0.27
9 0.233 0.194 0.162
Present Value
of Cash Flows $3.49 $3.12 $2.79 $2.48 $2.2
0 $1.95 $1.7
2 $1.52 $1.34 $1.98
Total Present Value of Cash Flows $22.59
Initial Capital Outlay $20.00
Net Present Value $2.59
C
By considering the above calculations, it can be noticed that the project should be accepted as
even by consideration of decline project is generating a positive return, i.e. positive net
present value. Therefore, even if the projection of cash flows are not as per expectations, the
proposed investment will provide benefit to the company.
(iii)
In both the investment options, the life of the project is different. Therefore evaluation of
both the projects will be done by considering annualised cost so that NPV of both the projects
can be compared.
Option A
Years Option A
Present Value
Factor @ 6%
Discounted Cash
Flows
0 $ 475,000.00 1.000 $ (475,000.00)
1 $ 100,000.00 0.943 $ 94,339.62

2 $ 100,000.00 0.890 $ 88,999.64
3 $ 100,000.00 0.840 $ 83,961.93
4 $ 100,000.00 0.792 $ 79,209.37
5 $ 100,000.00 0.747 $ 74,725.82
6 $ 100,000.00 0.705 $ 70,496.05
Total 5.917 $ 16,732.43
Annualised Yield NPV of the Project / Cumulative Present Value Annuity Factor
$16,732.43/5.917
$2827.70
Option B
Option B
Present Value Factor
@ 6% Discounted Cash Flows
$ 475,000.00 1.000 $ 475,000.00
$ 80,000.00 0.943 $ 75,471.70
$ 80,000.00 0.890 $ 71,199.72
$ 80,000.00 0.840 $ 67,169.54
$ 80,000.00 0.792 $ 63,367.49
$ 80,000.00 0.747 $ 59,780.65
$ 80,000.00 0.705 $ 56,396.84
$ 80,000.00 0.665 $ 53,204.57
$ 80,000.00 0.627 $ 50,192.99

$ 80,000.00 0.592 $ 47,351.88
7.802 $ 69,135.38
Annualised Yield
NPV of the Project / Cumulative Present Value Annuity
Factor
$1,019,135.38 /7.802
$8861.59
By considering both the options, it can be noticed Annual yield of the second option is
higher. Therefore, option B should be considered for the purpose of replacement.

PART B
Executive summary
Financial analysis is considered as the procedure of assessing business, budgets, projects and
another financial related business enterprise to identify the validity and performance. It is
employed to evaluate if or if not the business entity has enough profitability, solvency,
stability and liquidity to ensure a monetary investment. The prevailing study is based on the
financial analysis of the AMP limited to assess the involved risks and estimate the
performance of the company. The present study shows that the company has maintained an
effective financial structure, by raising balanced equity and debt and fixing the returns of
shareholders.
Introduction
The present study aims to evaluate and analyze the Annual Report of AMP Limited critically;
so as to conduct the comparative analysis of WAACC and capital structure, as well as the
study also covers the evaluation of key financial ratios of the AMP limited, to assess the
financial performance of the company. Following to this, the study also intends to consider
the major changes held in the capital structure of AMP limited in the past three years, with
the consideration towards the material risks identified in the annual report supported by the
appropriate mitigation strategies adopted by the company.
Comparative analysis of WAACC and capital structure
Table 2: Statement showing capital structure of AMP limited
Amount Weight
Equity $7202 26%
Long-term debt $21009 74%
Total $28211 100%
Table 3: Statement showing WACC of AMP Ltd
Weight Cost of finance Weighted Cost
(Cost of finance *

weight)
Equity 26% 9.73% Note 1 2.53%
Long term debt 74% 1.95% Note 2 1.46%
100% 3.99%
Cost of equity Cost of debt
ℜ= ( D iviend paid/ P rice of share ) + g rowth rate Interest cost (1−tax rate)
=.29/3.22+8% *2.79%* (1-.3)
=9.73% 1.95%
Calculation of Interest cost
Interest cost/long term debt*100
585/21009
2.79%
Table 4: Statement showing calculation of CAPM
Risk free rate of interest + beta (Return of market - Risk free rate of interest)
2.26%+ 1.47*(8.54-2.26%)
=11.49%
Risk free rate of interest is yield provided by Australian government bond
As per the computed CAPM, return provided by company is lower than market performance.
However, company is in their growth stage therefore it is expected that return rate will be
increase in near future.
Commonwealth bank Weight AMP Limited Weight
Equity 18726 23% 7202 26%
Long term debt 63,716 77% 21009 74%
82,442 100% 28211 100%

By considering capital structure of both the companies it can be noticed that both the
companies had considered similar strategy for maintaining capital structure. It is because;
both the banking organisations are profit making entities therefore to ensure optimum capital
cost it is viable to keep the portion of debt higher than equity.
Financial analysis of AMP Limited
(Source: MacroTrends, 2018)
2017 2016 2015 2014 2013
Liquidity ratios
Current ratio 0.6744 0.6517 07756 0.8581 0.8521
Solvency ratios
Long term
debt
0.4595 0.4542 0.5496 0.5162 0.4781
Debt/equity
ratio
0.8835 0.864 1.2439 1.0886 0.9701
Profitability ratios
Operating
margin
20.58% 15.67% 20.99% 23.43% 20.1%
Net profit
margin
12.30% 11.23% 12.83% 13.19% 11.91%
Efficiency ratios
Asset
turnover ratio
0.0816 0.0836 0.0837 0.0824 0.0775
Receivable
turnover ratio
2.079 2.2026 2.3075 2.4404 2.4293
Investment ratios
Return on
Equity
(ROE)
24.67% 22.88% 20.13% 21.51% 16.01%
Return on
Assets
(ROA)
1.00% 0.93% 1.16% 1.34% 1.02%
Return on 13.33% 11.39% 9.06% 10.40% 8.35%

Investment
(ROI)
By considering financial ratios of company it can be noticed that financial performance of
company has been improved in 2017 in comparison to 2016. However, it is having
fluctuating over five years. Company is generating profits but they are required to stabilise
their returns further liquidity of company is required to be improvised as it is lower than ideal
ratio i.e. 2:1. Therefore, for better working capital management company should enhance
their current assets. Investor ratios are constantly increasing which shows improvising
shareholder wealth of business and stabilised efficiency ratio shows, company had
maintained their capacity over the years to make optimum use of available assets.
Major changes held in the capital structure of AMP limited in past three years
AMP Limited
2017 Weight 2016 Weight 2015 Weight
Debt 21009 74% 5241 41% 6664 44%
Equity 7202 26% 7462 59% 8519 56%
28211 100% 12703 100% 15183 100%

2017 2016 2015
0%
10%
20%
30%
40%
50%
60%
70%
80% 74%
41% 44%
26%
59% 56%
Capital structure
Debt Equity
Figure 1: Major changes held in the capital structure of AMP limited in past three years AMP
Limited
By considering the table, it can be articulated that in the last three years, the company is more
committed towards equity and raising more finance for it to take benefit of profit
stabilization. On the other hand, at present company raised consideration towards the debt
and the main rationale for raising this concern is they can have more benefit of proceeds and
will not be forced to offer higher shareholder returns due to the fixation of their total returns.
Thus, with this decision company can have a better competitive edge and can generate profits
with the maintenance of suitable financial system (Annual Report of AMP Limited, 2016).
Hence, the debt raising resulted beneficial for the company, and the same step taken by the
company was more strategic and future-oriented, as the company’s performance is
developing over time, thereby stabilizing profits and strengthening the financial position (Liu,
2018).

AMP Limited’s Risk analysis
2017 2016 2015 2014 2013
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Investment ratios
Return on Equity (ROE) Return on Assets (ROA) Return on Investment (ROI)
Figure 2: Investment ratios showing shareholders return and wealth
The management of AMP Limited is liable for the determining, detecting and managing the
material risk emerging in the business (AMP Limited, 2018). In addition, the business unit
teams are held liable to make decisions and execute the same in the regular business course,
while mitigating the risks and the ultimate profit and loss in agreement with the strategy and
appetite of risks. Further, the ERM management teams, which are led by the head of the
group, are liable for developing, executing and managing the procedures to assess and
overcome with the material risks while offering suitable recommendations and supervision on
the business decisions based on material risks (Aven, 2015). On and on, the team also offers
objective and strategic advice while giving a challenge to the decisions of the first line and
offers a guarantee to the board that there is a proper alignment of the risk profile with the
expectations of the board. A summarization of the key business challenges of the AMP and
the material risks can be held in the report of the directors (Annual Report of AMP Limited,
2017). Further, the proper risk strategies are adopted by AMP to effectively describe the
material risk and manage the Risk appetite statement, while describing the amount and risk
tolerance nature in compliance with the corporate strategy. The seven determined materials
risks in the annual report of AMP are:

Table 5: Risks identified by AMP Limited
1. Concentration risk
2. Credit risk
3. Insurance risk
4. Liquidity risk
5. Market risk
6. Operational risk
7. Strategic risk
AMP limited has classified risks in seven key material risks types which are mitigated,
considered and documented to the board and reliable committees to make sure that the risk is
mitigated sufficiently. The business and the group of the AMP maintains the capital targets
stating their material risks inclusive of the risk appetite of the AMP, financial risks, product
risks, insurance risk, and operations risk (Henisz and Zelner, 2015). The company considered
risk mitigation strategies and maintained a management guide to the level of surplus capital
to make a reduction in the concerned risks.
Conclusion
Based on the above analysis, it can be concluded that the AMP limited has maintained an
effective financial structure lately, and has considered the strategy of altering capital to
ensure optimum financial costs. Thus, it can be said that the company had presently
implemented risk mitigation strategies to reduce risks and raise benefits.

REFERENCES
Liu, Z., (2018). Financial Situation Assessment of a Selected Company.
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.pdf>.
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https://corporate.amp.com.au/about-amp/corporate-governance/risk-management>.