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Financial Management Principles and Applications

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Added on  2021-05-30

Financial Management Principles and Applications

   Added on 2021-05-30

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FINANCEMEMORANDUMSTUDENT ID:[Pick the date]
Financial Management Principles and Applications_1
MEMORANDUMFrom: STUDENT NAMETo: CEO, Pinto LimitedDate: 15th May, 2018Subject: Proposed Project Evaluation (CONFIDENTIAL)Dear SirThe objective of this memo is to conduct an analysis of the proposed project in view of theincreasing competition. The critical aspects and assumptions undertaken for the analysis ofthe project are illustrated as follows.1)A feed to the extent of $ 25,000 has been spent on the market analysis which has beenconducted by an external consultant. This amount would be ignored from thecomputations as only incremental cash flows are imperative. However, the given cost issunk cost since it cannot be recovered even if project is not gone ahead with.(Damodaran, 2015).2)Also, the opportunity cost in relation to the current building has been considered. Thereason behind the same is that if this building is used for the given project that the rentincome to the extent of $ 250,000 per year would not be realised. Hence, this amount is anincremental loss on account of the project (Northington, 2015).3)It is known that the initial spending on plant and equipment would be $ 15 million and theexpected salvage value at the end of the useful life is expected to be zero. In such ascenario, the straight line depreciation would amount to $ 3 million on an annual basis. 4)The incremental working capital that would be required would be investment at the projectbeginning.5)Besides, considering that the various capital budgeting measures are based on discountedcash flows and hence assumption has been made that the cash flows arising from theproject are realised at the last day of the year. For the application of the above capital budgeting techniques, the key requirement is thatincremental cash flows expected from the project need to be estimated considering theinformation provided. The incremental cashflows are illustrated as follows.
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Having estimated the expected project cash flows over the useful life, the various capitalbudgeting techniques would be applied so as to enable making a conclusion with regards toundertaking the project.1)NPV (Net Present Value)NPV = $ 5.6 million.2)IRR (Internal Rate of Return)The IRR has been computed using the cash flows estimation provided above (Brealey, Myersand Allen, 2014).IRR = 21.13% p.a.3)Payback Period The computation indicated as follows are helpful for payback period determination(Damodaran, 2015).
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