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Financial Analysis

   

Added on  2023-04-21

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Running Head: FINANCIAL ANALYSIS 0
FINANCIAL ANALYSIS
Financial Analysis_1

FINANCIAL ANALYSIS 1
Abstract
AYR co is basically a company that is looking out for the proposals of investment of two
categories namely Aspire and Wolf. According to the information provided in the case study the
Directors of the AYR Co. are being advised on how to plan the capital expenditure. On the basis
of certain assumptions the Net Present Value, Internal Rate of Return and Payback period of the
projects were calculated. After comparing both the projects of the company the Project Aspire
has been recommended to the company due to the great amount of cash flows as compared to the
Project Wolf. However a number of other factors are also required to be considered in terms of
the financial and other market forces.
Financial Analysis_2

FINANCIAL ANALYSIS 2
Contents
Abstract.......................................................................................................................................................1
Phase 1: Capital Investment Appraisal........................................................................................................3
Methods and Techniques.........................................................................................................................3
Phase 2: Analysis and evaluation of the investment project option.............................................................4
Findings...................................................................................................................................................4
Net Present value.................................................................................................................................4
Internal Rate of Return........................................................................................................................6
Payback period....................................................................................................................................6
Interpretations and Recommendations.....................................................................................................8
Other factors............................................................................................................................................9
Financing and its sources...........................................................................................................................10
Description of Equity and Debt.............................................................................................................11
Cost of financing...................................................................................................................................12
Effects on WACC..................................................................................................................................13
Shareholders and Impact.......................................................................................................................13
Conclusion.................................................................................................................................................14
References.................................................................................................................................................15
Appendix...................................................................................................................................................18
Financial Analysis_3

FINANCIAL ANALYSIS 3
Phase 1: Capital Investment Appraisal
The capital investment appraisal is a segment of the planning which assist in evaluating the long
terms investments or the short term investment. There are various methods to calculate the
viability of the investments and such techniques are namely IRR, Net present Value, and
Profitability index. The current report will be restricted to these three methods an these
techniques are used to determine the future prospects that will be beneficial after the
implementation. In order to increase the market share the AYR Co shall focus on the ability of
the projects to generate enough cash flows (Caselli and Negri, 2018).
Methods and Techniques
As mentioned in the report the three methods of the appraisal and capital investments include the
net present value, the IRR and the payback period. The first two methods also consider the
concept of the time value of money (Burns and Walker, 2015).
Net Present value: it is the calculative description of the difference between the inflows and the
outflows of the cash. The net present value is calculated at the discounted rate. The decision on
the basis of the net present value can be considered on the basis of the high or low present value.
The higher the net present value, the desirability of the project increases accordingly (Rad,
Jamili, Tavakkoli-Moghaddam and Paknahad, 2016).
Formula:
NPV = Cashflow - Initial Investment
(1+i)^t
Financial Analysis_4

FINANCIAL ANALYSIS 4
Internal rate of return: IRR is the discounting rate that brings the NPV value equivalent to
zero. The decision on the basis of the IRR can be taken if the cost of capital is lower than the
IRR, otherwise the project is rejected (Gallo, 2016).
Formula:
IRR(Sum of cash flows including initial investment)
Payback period: The payback period can be referred to as the period in which the cost of
investment can be recovered. The investment proposals that have the shorter payback period
shall be selected (Abor, 2017).
Payback Period = A
+
B
C
Variable A: is the last period with a negative cumulative cash flow;
Variable B: is the absolute value of cumulative cash flow at the end of the period A
Variable C: is the total cash flow during the period after A
Phase 2: Analysis and evaluation of the investment project option
Findings
Net Present value
To analyze the discounted cash flows, NPV stands out as one of the common techniques used for
measuring the projects. In this way the future uncertainty of the cash flows is compensated. This
techniques allows the good comparison between the cash flows, hence the net present value is a
good factor to analyze the present position of the investment proposals. For two investment
proposals the project with higher NPV shall be selected. For the purpose of calculation the
Financial Analysis_5

FINANCIAL ANALYSIS 5
discounted rate of 10% is used to discount all the net cash flows to their present value. The same
can be observed with the help of the table (Leyman and Vanhoucke, 2016).
Project Aspire
Calculation of
Net present
Value
Years Cash
flows
Discounting
Factor @
10%
NPV
0 -2250000 1.00
-
2250000
1 623000 0.91 566930
2 665328 0.83 552222
3 664403 0.75 498302
4 699570 0.68 475708
5 1113063 0.62 690099
6 -193599 0.56 -108415
Net Present
Value 424846
Project Wolf
Calculation of Net
present Value
Years Cash
flows
Discountin
g Factor @
10%
NPV
0
-
225000
0 1.00
-
225000
0
1 847600 0.91 771316
2 678350 0.83 563031
3 678384 0.75 508788
4 678273 0.68 461226
5 678019 0.62 420372
6
-
169518 0.56 -94930
Net Present Value 379801
Financial Analysis_6

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