FIN20014 Financial Management: Capital Budgeting Analysis Report

This report presents a capital budgeting analysis for a new PDA project, employing investment appraisal techniques such as net present value (NPV), payback period, profitability index, and internal rate of return (IRR). The project's feasibility is determined through an analysis of computed figures, with profitability assessed by calculating the difference between the present value of future cash flows and the initial investment. A positive NPV, as observed in this case ($1,236,783), suggests project acceptance due to the higher present value of future returns compared to the initial investment. The profitability index of 1.044 further supports acceptance, indicating a return exceeding the required rate. The IRR of 13.51%, surpassing the required rate of 12%, aligns with IRR criteria for project viability. With a payback period of 3.82 years, the project's initial investment is recovered in 3 years and 8 months, deemed acceptable due to the relatively short duration. Based on these analyses, the report concludes that the project should be accepted.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

1FINANCIAL MANAGEMENT
Table of Contents
Capital Budgeting Analysis (Normal View):..................................................................................2
Capital Budgeting Analysis (Formula View):.................................................................................3
Report:.............................................................................................................................................4
References list:.................................................................................................................................5

2FINANCIAL MANAGEMENT
Capital Budgeting Analysis (Normal View):
Particulars 0 1 2 3 4 5
Initial Investment:
Development Cost -$7,80,000
Purchase of Machinery -$2,45,00,000
Working Capital -$29,00,000
Total Initial Investment -$2,81,80,000
Operational Cash Flow:
Price/Unit $250 $260 $270 $260 $250
Variable Cost/Unit $95 $95 $95 $95 $95
Volume (units) 61200 71200 85440 75500 70000
Sales Revenue $1,53,00,000 $1,85,12,000 $2,30,68,800 $1,96,30,000 $1,75,00,000
Variable Cost -$58,14,000 -$67,64,000 -$81,16,800 -$71,72,500 -$66,50,000
Fixed Costs -$25,00,000 -$25,00,000 -$25,00,000 -$25,00,000 -$25,00,000
Depreciation on Machinery -$35,00,000 -$35,00,000 -$35,00,000 -$35,00,000 -$35,00,000
Promotion & Advertising -$23,00,000
Net Profit Before Tax $11,86,000 $57,48,000 $89,52,000 $64,57,500 $48,50,000
Less: Income Tax -$3,55,800 -$17,24,400 -$26,85,600 -$19,37,250 -$14,55,000
Net Profit after Tax $8,30,200 $40,23,600 $62,66,400 $45,20,250 $33,95,000
Add: Depreciation on Machinery $35,00,000 $35,00,000 $35,00,000 $35,00,000 $35,00,000
Net Cash Flow from Operation $43,30,200 $75,23,600 $97,66,400 $80,20,250 $68,95,000
Salvage Value:
Sale of Machinery $49,00,000
Less: Tax on Sales $14,70,000
Net Receipts from Sales $34,30,000
Recovery of Working Capital $29,00,000
Total Salvage Value $63,30,000
Net Cash Flow -$2,81,80,000 $43,30,200 $75,23,600 $97,66,400 $80,20,250 $1,32,25,000
Required Rate of Return 12% 12% 12% 12% 12% 12%
Discounted Cash Flow -$2,81,80,000 $38,66,250 $59,97,768 $69,51,531 $50,97,014 $75,04,220
Cumulative Cash Flow -$2,81,80,000 -$2,38,49,800 -$1,63,26,200 -$65,59,800 $14,60,450 $1,46,85,450
Net Present Value $12,36,783
Payback Period (in years) 3.82
Profitability Index 1.044
Internal Rate of Return 13.51%
Years

3FINANCIAL MANAGEMENT
Capital Budgeting Analysis (Formula View):
Particulars 0 1 2 3 4 5Initial Investment:
Development Cost -780000
Purchase of Machinery -24500000
Working Capital -2900000
Total Initial Investment =SUM(B5:B9)Operational Cash Flow:
Price/Unit 250 260 270 260 250
Variable Cost/Unit 95 =C14 =D14 =E14 =F14
Volume (units) 61200 71200 85440 75500 70000
Sales Revenue =C13*C15 =D13*D15 =E13*E15 =F13*F15 =G13*G15
Variable Cost =C15*-C14 =D15*-D14 =E15*-E14 =F15*-F14 =G15*-G14
Fixed Costs -2500000 =C19 =D19 =E19 =F19
Depreciation on Machinery =B8/7 =C20 =D20 =E20 =F20
Promotion & Advertising -2300000
Net Profit Before Tax =SUM(C17:C21) =SUM(D17:D21) =SUM(E17:E21) =SUM(F17:F21) =SUM(G17:G21)
Less: Income Tax =C22*-30% =D22*-30% =E22*-30% =F22*-30% =G22*-30%
Net Profit after Tax =C22+C23 =D22+D23 =E22+E23 =F22+F23 =G22+G23
Add: Depreciation on Machinery =-C20 =-D20 =-E20 =-F20 =-G20
Net Cash Flow from Operation =C24+C25 =D24+D25 =E24+E25 =F24+F25 =G24+G25Salvage Value:
Sale of Machinery 4900000
Less: Tax on Sales =G29*30%
Net Receipts from Sales =G29-G30
Recovery of Working Capital =-B9
Total Salvage Value =G31+G32
Net Cash Flow =B33+B26+B10 =C33+C26+C10 =D33+D26+D10 =E33+E26+E10 =F33+F26+F10 =G33+G26+G10
Required Rate of Return 0.12 =B36 =C36 =D36 =E36 =F36
Discounted Cash Flow =B35/((1+B36)^B4) =C35/((1+C36)^C4) =D35/((1+D36)^D4) =E35/((1+E36)^E4) =F35/((1+F36)^F4) =G35/((1+G36)^G4)
Cumulative Cash Flow =B35 =B38+C35 =C38+D35 =D38+E35 =E38+F35 =F38+G35
Net Present Value =SUM(B37:G37)
Payback Period (in years) =E4+(-E38/F35)
Profitability Index =1+(B40/-B35)
Internal Rate of Return =IRR(B35:G35)
Years

4FINANCIAL MANAGEMENT
Report:
The report is prepared to conduct the evaluation of new PDA project using techniques of
investment appraisal such as net present value, payback period, profitability index and internal
rate of return. Feasibility of the project would be determined by analysis of the computed figures.
Profitability of project is determined by computation of difference between present value of
future cash flow and initial investment. Positive net present value depicts that project should be
accepted as the present value of future return is more than initial investment made (Levin and
Hallgren 2017). It can be seen from the table above that net present value of the project is $
1236783 and this positive value is indicative of the fact that project should be accepted. The
value of profitability index computed for the PDA project stood at 1.044 and any project having
value of profitability index greater than one should be accepted. This depicts that return of
project is more than the required rate of return. Now, looking at the figures of internal rate of
return that is 13.51%, it can be seen that the rate is higher than the required rate of return of
project at 12%. As per IRR criteria, it is viable to accept the project of higher value compared to
required rate of return (Burns and Walker 2015). The payback period of the project is computed
at 3.82 that are indicative of the fact that total time taken by project to return the initial
investment is 3 years and 8 months. Project with lower payback period should be acceptable.
Therefore, from the analysis of figures, it can be inferred that project should be accepted.

5FINANCIAL MANAGEMENT
References list:
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.
Levin, V. and Hallgren, A., 2017. The choice of capital budgeting techniques: a human capital
approach.
Turner, M.J. and Coote, L.V., 2018. Incentives and monitoring: impact on the financial and non-
financial orientation of capital budgeting. Meditari Accountancy Research, (just-accepted),
pp.00-00.