Feasibility Analysis of Developing a Site for Fangio Brothers Smash Repairs Pty Ltd

This report analyzes the feasibility of developing a site for Fangio Brothers Smash Repairs Pty Ltd. It uses net present value and internal rate of return approaches to determine the project's profitability. The report recommends expanding the business onto the vacant block of land.

Running head: FINANCIAL MANAGEMENT
Financial management
Name of the project
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Author note

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Executive summary
Fangio Brothers Smash Repairs Pty Ltd (FBSR) is engaged in smash repair business that
is located in western suburb of Sydney. As the company is facing some issues due to the control
and dominance exertion by major insurance entities, for maintaining future growth and
profitability the company is considering development of the site. Main objective of the report is
to analyse the feasibility of the projected plan of developing the site. Different methods like net
present value approach and internal rate of return approach will be used for analysing the
project’s feasibility (Bora 2015).
Net present value –
NPV is the future value of all the cash inflows that is expected to be earned over the
entire life of the project. It is a form of the intrinsic valuation and is extensively utilised all over
the accounting and finance field to determine the business value, capital project, investment
security, program of cost reduction and any other thing that involves the cash flow. NPV
approach is used for determining the value of the investment project or the series of cash flows.
Further it is the all-encompassing metric as it considers all the expenses, revenues and the capital
costs associated with the investment and its free cash flows (Žižlavský 2014). Apart from that, it
is used for factoring all the costs and revenues as it further takes into account timing of each of
the cash flows that may largely impact the investment’s present value. For instance, it is better
option to get the cash inflows today instead of getting it one year later. NPV determines whether
the projected financial gains will exceed the initial investment of the project (Gallo 2014).
Generally, the investment is accepted if the NPV of the project is positive as the project with
positive NPV signifies that the project will be profitable and hence, shall be considered for
investment. On the contrary, project with the negative NPV signifies that the initial outlay will
exceed the entire projected cash inflows from the project and hence, is not considered for
investment. Looking into the NPV from the development site project of FBSR it can be
identified that the net present value of the project at the discount rate of 8.25% is 8,53,122.30.
The positive NPV is signifying that the project, if taken up, will increase the value of the
company as well as the shareholders (Dinagar and Kamalanathan 2015).
Internal rate of return –
IRR is the rate of discount at which the investment’s NPV is zero. In other way, IRR is
the compound annual return that is expected by an investor to be earned over the useful life of
the project. It is a capital budgeting metric that is used for measuring the profitability extent. It is
considered as a useful metric as it can be used for carrying out the comparative analysis rather
than offering the one value in isolation. If 1 project is to be selected from 2 or more mutually
exclusive projects the project with higher IRR can be chosen for investment. Higher the IRR of
the project, the project is more desirable. It is uniform for the investments of different types and
hence, values of IRR is used for ranking prospective multiple projects (Patrick and French 2016).
However, IRR involves various assumptions like – (i) investment will be held til the date of
maturity (ii) all cash flows are of periodic nature or the time gap among various cash flows are
equal (iii) intermediate cash inflows will be re-invested in the IRR itself. It provides the entity
with the growth rate that can be expected to be earned through making the investment in the
project. Generally the organisations keep the hurdle rate and the project that exceeds the hurdle
rate is accepted if other criteria are not to be considered. As per one of the director of FBSR,

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Michael Potter 15% return on this type of investment is appropriate. Looking into the IRR from
the development site project of FBSR it can be identified that the IRR of the project is 26.85%
which is more than 15% that is the appropriate rate of this type of project. Hence, the IRR of the
project is signifying that the project will create return for the shareholders if it is taken up (Ng
and Beruvides 2015).
Recommendation
Both NPV and IRR of the project is fulfilling the acceptability criteria that is the NPV is
positive and the IRR is more than the required rate of 15%. Hence, it is recommended to the
director of FBSR that they shall expand the business onto the vacant block of the land.

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Reference
Bora, B., 2015. Comparison between net present value and internal rate of return. International
Journal of Research in Finance and Marketing, 5(12), pp.61-71.
Dinagar, D.S. and Kamalanathan, S., 2015. A note on maximize fuzzy net present value with
new ranking. Intern. J. Fuzzy Mathematical Archive, 7(1), pp.63-74.
Gallo, A., 2014. A refresher on net present value. Harvard Business Review, 19.
Ng, E.H. and Beruvides, M.G., 2015. Multiple internal rate of return revisited: frequency of
occurrences. The Engineering Economist, 60(1), pp.75-87.
Patrick, M. and French, N., 2016. The internal rate of return (IRR): projections, benchmarks and
pitfalls. Journal of Property Investment & Finance, 34(6), pp.664-669.
Žižlavský, O., 2014. Net present value approach: method for economic assessment of innovation
projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.