Investment Analysis and Project Selection

This assignment presents a case study where a company is evaluating two investment options (option-1 and start_-1). Students are tasked with analyzing these options using Net Present Value (NPV), Internal Rate of Return (IRR), and risk considerations. They must determine which option offers the highest potential return and value creation for the company, considering factors like discounted cash flow and the viability of projected cash inflows. The analysis should also include a discussion on mitigating the comparatively low IRR of the preferred option and the overall risks associated with each investment choice.

RUNNING HEAD: Financial analysis of company
1
Name of the student-
Topic- Financial analysis of company
University name-

Financial analysis of company 2
Executive summary
This report will help readers to evaluate and analysis all the investment options and use
of investment tools for creating value on the investment. There are several financial tools such as
net present value, profitability index, ratio analysis and discounted cash flow management. This
will help investors to create value on the investment in determined approach. In this report, three
investment options have been gauged to create value on the investment in efficient manner.

Financial analysis of company 3
Table of Contents
Executive summary............................................................................................................2
Introduction........................................................................................................................3
Objective of this report.................................................................................................. 3
Current strategic of organization....................................................................................3
Three project alternative....................................................................................................4
Project options and evaluation methods.............................................................................5
Computation of cost capital and cost benefits analysis.....................................................6
Analysis and cost and benefits analysis............................................................................11
Evaluation of risk of the project.......................................................................................11
Recommendation.............................................................................................................12
Conclusion....................................................................................................................... 13
References........................................................................................................................14

Financial analysis of company 4
Introduction
This report reflects the key understanding on the financial performance of company and
how financial tools could be used to gauge the financial performance of company. There are
several financial tools such as net present value, profitability index, ratio analysis and discounted
cash flow management. It is better to use these financial tools before investing money in
particular investment options. If investors could these options in effective manner then it will
increase the value of the investors in determined approach. In this report, three alternatives
project options have been taken into consideration.
Objective of this report
This report reflects how well board of directors of company could make effective
business decisions to make investment. The main objective of this report is to analyse the
investment options available for the investors by using proper investment tools in determined
approach (Vogel, 2014).
Current strategic of organization
There are several strategies such as using of effective investment tools such as strategic
net present value, discounted cash flow and use of proper investment methods and means. In this
report, there are three particular capital investment options which could be used to make
effective use of resources in business (Bodie, 2013).

Financial analysis of company 5
Three project alternative
In this part, critical analysis has been made to evaluate which investment option would be
good for the investors for investment decision (Grant, 2016).
Particular Investment option
Investment-1 Investing money in strategic alliance with other
organization. This will require amount of
capital AUD $ 5, 00,000. This will help
company to increase the brand image and
increased revenue.
Investment Option-2 Installing cyber computing system in its value
chain activities. This will be amount of
investment capital around AUD $ 7, 00,000.
This will increase the production level and
increased overall revenue.
Investment option-3 Investment of AUD $ 6, 00,000 for developing
research and development department. This
will help company to develop effective
innovative strategy.

Financial analysis of company 6
These are the above give investment options are the best suitable course of action which
could be used by board of directors of company to create value on company’s investment
amount. Investment decision of board of directors would be based on the net present value,
discounted cash flow, and profitability index. These investment tools will analyze all the cash
inflow and outflow of business throughout the time.
Project options and evaluation methods
This has shown that these three projects options are the best possible options which could
be undertake by company on the basis of net profit drive by company (Fontana and Schleicher,
2016).
Particular
Project
investment-1
Project investment
-2
Project investment
-3
Initial outflow cash flow AUD $ 10,00,00 AUD $ 1200000 AUD $ 11,00,000
Cost associated with the
project - - -
Revenue 100000 110000 112000
Variable cost 60000 70000 45000
Contribution 40000 40000 67000

Financial analysis of company 7
Fixed cost 10000 10000 10000
Profit 30000 30000 57000
Computation of cost capital and cost benefits analysis
It is the amount of cost which is required to pay to the investors for creating value on the
investment. Company has 20% cost of capital after evaluating all the data and ASX index
throughout the time (Bekaert and Hodrick, 2017).
Computation of weighted average cost of capital
Particular
Amount (AUD$ in
million) Weight
Cost of
capital
weighted average cost
of capita
Equity 863 0.66538 15.88% 0.019137973 0.00304
Debt 434 0.33462 12.41935484 0.809560524 10.0542
Total 1297
1 12.44811724 0.828698497 10.3157

Financial analysis of company 8
capital
Cost of
capital 20.373
Project investment option-1
Evaluation of Project investment options (Cost of capital-
20%)
Project investment -1
Years 2017 2018 2019 2020 2021
cash inflow 34000 38000 42000 46000 500000
Present value factors 0.83333 0.69444 0.5787
0.4822
5 0.40188
Present value of cash inflow 28333.3 26388.9 24305.6
22183.
6 200939

Financial analysis of company 9
Total cash outflow 100000
Present value of cash inflow 302150
NPV 202150
Net present value- It is the different between present value of cash inflow and present value of
cash outflow. It has shown how well company has increased its value on investment. Company
has managed its net present value of $ 202150 (Brigham, and Ehrhardt, 2013).
IRR- It is amount of required return which company needs to earn from its investment options.
Therefore, IRR of company is 18% which is less than cost of capital. This option should be not
accepted as per the IRR calculation (Brigham, 2014).
Evaluation of Project investment options-2 (Cost of capital- 20%)
Project investment -2
Years 2017 2018 2019 2020 2021
cash inflow 34000 38000 42000 46000 50000
Present value factors 0.83333 0.69444 0.5787 0.4822 0.40188

Financial analysis of company 10
5
Present value of cash inflow 28333.3 26388.9 24305.6
22183.
6 20093.9
Total cash outflow 100000
Present value of cash inflow 121305
NPV 21305.3
Net present value- It has given higher net present value of $ 21305 to the organization. As
compared to project option -1, company should adopt this investment option.
IRR- This IRR is 22% which is more than its cost of capital. Therefore, company should accept
this investment option (Petty, et al., 2015).
Project investment option-3
Evaluation of Project investment options-3 (Cost of capital- 20%)
Project investment -3
Years 2017 2018 2019 2020 2021

Financial analysis of company 11
cash inflow 32000 33750 32000 33750 32000
Present value factors 0.83333 0.69444 0.5787
0.4822
5 0.40188
Present value of cash inflow 26666.7 23437.5 18518.5 16276 12860.1
Total cash outflow 100000
Present value of cash inflow 97758.8
NPV -2241.2
Net present value- In this case, company has negative present value which reflects that company
will destruct the value of the investment if it indulged in this project investment option.
IRR= Company has higher IRR which reflects that company should accept this investment
options and increase its overall return throughout the time (McKinney, 2015).
Justification of discount rate used

Financial analysis of company 12
It is evaluated that while investing money in particular options and considering cost and benefits
associated with it, it is considered that project option 1 is more important and provides more
value to the board of directors. The discount rate of this project is based on the computed cost of
capital of the company. Computation of discounted cash flow could be seen by observing the
excel file attached with this report (Arnold, 2013).
Analysis and cost and benefits analysis
These three projects have different revenue and cost associated with it. However, project
option A has more net present value which reflects that if company could increase the overall
value then the net present value of company will also be increased throughout the time. In
addition to this, it is considered that project option-1 has higher net present value. Therefore,
company should opt the investment option 1 to create value on its capital. In addition to this,
project investment-2 has also earning capacity and shows less level of income to the investors.
On the other hand, project investment-3 has negative value. If company invests in this
investment project then it will have to bear amount of loss or destruction of the value. These
three projects have been evaluated by using discounted cash flow method and using 20%
discount rate to identify the present value of the inflow (Robinson and Burnett, 2016).
Evaluation of risk of the project
This project has shown various risk associate with it. Ideally risk could be measured in
terms of systematic and unsystematic risk. Systematic risk could not be avoided and based on the
external factors of business. This company is engaged in international business which provides

Financial analysis of company 13
higher calculation factors for the business. Company has adopted the investment project-1 which
reflects positive net present value of AUD $ 202150 which is very high and create high amount
of cash for the business. In addition to this, company may face various internal and external
factors risk and it may result to destruction of the total net present value of AUD $ 202150. This
risk would be such as foreign exchange risk, sluggish market condition, stock market behaviour
and changes in government policies and measures. This level of changes will showcase possible
flexible factors which should be undertaken by company before accepting investment project.
However, unsystematic risk could be considered by taking BETA of company (Fickler, et al.
2016). Company has beta of .64 which is very low. It reflects that company will change by .64%
if there is change in the market factors by 1%. It has positive relation and other rivals of the
business will also be affected by it at the same tangent. Therefore, company estimated this beta
by undertaking the share price fluctuation. However, determination of discounted cash flow rate
is based on these all the internal and external factors of business. If company determine the cost
of capital by computing beta and other factors then these level of changes will put negative
impact on the estimated net present value of the investors. These all risks could be mitigated by
following proper methods and evaluation methods in determined approach. Company has various
risks but the main risk of company is related to sluggish market condition. If company wants to
overcome this risk then it has to invest its money in other diversified market sector. In addition to
this, employee’s turnover and downfall in business will also be highly impacted by the business
functioning of the company (Petty, et al. 2015).

Financial analysis of company 14
Recommendation
After evaluating all the factors and business condition of the company, it is evaluated that
if company could manage these risk in efficient manner then it will not only increase the overall
value of the investment but also increase the investment amount. In addition to this, beta of
company has also shown that company has less variable factors if company invest in first project
it will surely increase the value of the investment (Radebaugh, Gray and Black, 2006). It is
considered that these three projects have different viability and showcase the different outcomes
throughout the time. If investment is made in second project option then company could create
value on its investment but there will be fewer outcomes. On the other hand, investment option
third will give the negative outcomes and destruct the value of the investment. In the end,
investment option-1 is more profitable and provides higher return to the investors. Now in the
end, it could be inferred that if company could invest its money in other business options or
investment option-1 then it would surely increase the value of the investment. Board of directors
should not only consider the Net present value, discounted cash flow but also they needs to
identify the viability of the cash inflow and positive and negative factors of these investment
options (Brealey, Myers and Marcus, 2015).
Conclusion
After considering all the internal and external factors of business, it is considered that
board of directors of company should invest their capital in project option-1 to create value on
their investment. However, IRR of that investment option is comparatively low which could be
mitigated by company by decreasing its overall cost of capital. In addition to this, risk associated
with the business also very low which reflects that company has higher profitability if it accepts

Financial analysis of company 15
the project option-1 in its investment options. Now in the end, it could be inferred that company
should assess the cost and benefits associated with the project before investing money in this
particular project.