Financial Feasibility Evaluation for Pinto Ltd's New Product

FINANCE
MEMORANDUM
STUDENT ID:
[Pick the date]

MEMORANDUM
TO: CEO, Pinto Ltd.
FROM: STUDENT NAME
Date May 20, 2018
SUBJECT: Project Financial Feasibility Evaluation (Confidential in nature)
Dear Sir
The company has recently proposed venturing out into a new product citing higher
competition for the current business. The given memo aims to present the findings of various
financial analyses which have been undertaken to evaluate the project using relevant
techniques. Based on the key expected cash flows that the project is expected to deliver, a
base case financial feasibility has been conducted. To account for potential aberrations in key
input variables, uncertainty analysis has been undertaken. By considering the output obtained
from these, recommendation with regards to future course of action has been offered to
enable decision making in a prompt manner. Certain key assumptions and explanations in
regards to estimation of incremental cash flow from project acceptance are mentioned below.
1) One critical assumption on the basis of which the financial analysis has been carried out
highlighted in this memo is the occurrence of cash flows at end of each year and not on an
ongoing basis. This is critical so that the various capital budgeting criteria can be deployed
(Petty et. al., 2015).
2) As per the proposed project plan, it is estimated that the production of the new product
would be held at the factory that the company owns. However, it is noteworthy that
currently the factory is put to alternative use whereby it produces income as rent for the
company annually @ $250,000. In the event of acceptance of project, the incremental
change would be witnessed as the rent income would have to be given up. On account of
this, factory related opportunity cost has been reflected in the cash flows (Damodaran,
2015).
3) In accordance with the information provided, it is apparent that fro sales projections of the
new product over the five year period, an external consultant has been appointed.
However, the cost of external consultant services would not be included in the financial

analysis since it is a sunk cost which cannot be recovered under any project related
decision that would be made (Brealey, Myers and Allen, 2014).
Estimation of Base Case Cash Flows
The relevant estimation has been summarised below.
Base Case- Feasibility Analysis
For the base case related cash flows, it is imperative to conduct analysis using proper
techniques related to capital budgeting. This has been carried using excel spreadsheet and the
relevant result is captured below.
Analysis of uncertainty
Even though the base case highlights financial feasibility but considering the nature of the
project and higher perceived risk, the robustness of the project under uncertainty needs to be
captured particularly when the inputs highlight an adverse movement. One such variable is
the discount rate since the project is riskier than the average project by the company and