Powerboat Production in Penta Group
Added on 2021-06-15
27 Pages5097 Words323 Views
Finance
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Running head: FINANCIAL MANAGEMENT Financial ManagementName of the Student: Name of the University: Author’s Note:
1FINANCIAL MANAGEMENT Executive Summary The concerned report is associated in order to give out knowledge and understanding to the CFOof “PENTAG” company regarding the project that is ideal for them to undertake in order toexpand and develop their business and thereby initiate a new line of business in the Powerboatproduction. An excel sheet has been constructed with the help of which cash flow statement thathas been constructed has been able to realise the net present value of each of the two projects andthereafter come to the decision with respect to which of the projects is perfectly suitable for thecompany. The outcome that has been attained has recommended that project “Q-Powerboat” isideal for “PENTAG” Company.
2FINANCIAL MANAGEMENT Table of ContentsIntroduction......................................................................................................................................3Findings...........................................................................................................................................3Quantitative Aspects....................................................................................................................4Qualitative Aspects......................................................................................................................6Recommendations and Justifications...............................................................................................7Detail Comparison and Further Recommendation..........................................................................7Conclusion.......................................................................................................................................7Bibliography....................................................................................................................................9Appendix........................................................................................................................................11
3FINANCIAL MANAGEMENT IntroductionThe concerned report is related to have knowledge about the boats that are produced by“PENTAG” Company. The company has constructed the plan of producing powerboats, whichwould be environment friendly in nature in order to reduce the pollution level in theenvironment. This is seen to be a niche market and therefore effective level of development andresearches would create much better and advanced products. The firm has decided to take moreinvestments from the market in order to start producing the new products and hence new andimproved plants and machineries are in demand and additional cost of transaction would belevied. “PENTAG” demands for investment in the initial stock and hence the firm has decided tofinance the new project by issuing 10% debentures of $10 million and the additional moneywould be collected from the equity. In this scenario, it is essential for the company to gain anunderstanding of the project that stays fit and thereafter construct steps and plans with the help ofwhich they would be able to improve their operational activities. The company hasrecommended two projects and they are manufacturing of “Q-Powerboat” and manufacturing of“S-Powerboat” and in order to understand the one that is ideal for the company, an evaluation ofthe concerned two projects has been initiated and thereby understand, which of the projects giveout better return on investment. A comparative analysis of the statement of the cash flows hasbeen effective enough in order to have a clear idea of the approach of capital budgeting that canbe undertaken in order to assess the two concerned projects. FindingsThis section of the report addressees the outcome of the overall research that has beengathered after the examination of the constructed cash flow statement and the outcome that is
4FINANCIAL MANAGEMENT created are in line with the qualitative and the quantitative elements that are associated with thetwo projects. Quantitative Aspects The quantitative aspect refers to the figures and amounts that have been constructed bycreating the cash flow statement and accordingly the results that have been obtained will beexplained in an effective manner. The initial investment of $21,500,000 has been found for “Q-Powerboat” and the plant and equipment cost has been $20,000,000. The transportation andinstallation cost has been $800,000 whereas the stock investment has been $500,000 and theadditional fund from the debtor has been $380,000. In this manner, a cash flow statement for thecoming six years has been constructed for “Q-Powerboat”. The net operating cash flow for thisproject has been found to be $8,973,000 after the end of year one and thereafter the results haveshown that there has been a fall in the net operating cash flow in the coming years and at the endof the sixth year the figure has been $5,823,000. “Q-Powerboat” project has its net salvage valueto be $2,800,000. The initial rate of discount for “Q-Powerboat” is 20% after which assessmenthas been made with respect to the discovery of the cumulative discounted cash flow value. Thenet cash flow for “Q-Powerboat” project has been $8,973,000 in the first year and then this valuehas diminished but the in the last year the value has been $8,623,000, which has been relativelyhigher than the previous years. The cash flow statement has been able to address the internal rateof return, net present value, payback period and discounted payback period. The values for netpresent value are seen to be $4,276,443, while the internal rate of return has been 29.67%. Thepayback period has been 2.54 and on the other hand 4.135 has been the discounted paybackperiod.
5FINANCIAL MANAGEMENT Now, while considering “S-Powerboat” it is observed that the initial investment has beensame and the value has been $21,500,000 and this money has been utilised in the purchase ofplant and machinery worth $20,000,000, cost of installation to be $800,000 and the stock ininvestment to be $500,000. The future cash flow of the project has been rising from the initialyear and at the end of the sixth year the figure amounted to $11,100,000. In the first year, the netcash flow has been $6, 40,000 and this figure increased to $11,100,000 in the last year. Theattainment of these values have led to the discovery of net present value and the same has been$4,288,489 at an internal rate of return at 28.42%, 2.97 has been the payback period and 4.618has been the discounted payback period at a discount rate of 20%. The outcome at 20%discounted rate has explained that both the projects are favourable however; “S-Powerboat” hasa slight edge over “Q-Powerboat”. On the other hand, when the discount rate is increased from 20% to 25%, there has been amassive change in the values of the two projects. As the discount rate has changed, there hasbeen no effect on the net cash flow for the two projects but because the discount rate has changedit is seen that there has been fall in the net present value and the other rates of returns as well. For“Q-Powerboat”, the net present value has accounted to $1,794,528. In the same manner, theinternal rate of return has been 29.47% and the payback period has the same percentage as thediscount rate of 20% and the percentage has been 2.54%. The change in the discounted paybackperiod has been 5.008. By assessing the amended cash flow statement of “S-Powerboat” the changes have onlybeen observed in the net present value and discounted payback period. The values that have beenobtained have indicated the fact that the net present value has been $1,504,466 and thediscounted payback period has been 5.338 for “S-Powerboat”.
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