Financial Management

The report deals with Tasmanian Motor Rental (TMR), which is a proprietary firm in the car rental industry and it is considering whether to enter the discount retail car market in Tasmania. It has been found that TMR has considered all relevant costs for entering into the discount car rental market in Tasmamia. The techniques used for analysing the proposed project include payback period and net present value based on which it has been found that the project is favourable for the organisation. However, if the sales revenue falls by 10%, there would be considerable amount of loss. Hence, the management needs to take into account the other non-financial aspects before undertaking the project.

Running head: FINANCIAL MANAGEMENT
Financial Management
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Executive Summary:
The report deals with Tasmanian Motor Rental (TMR), which is a proprietary firm in the car
rental industry and it is considering whether to enter the discount retail car market in Tasmania.
It has been found that TMR has considered all relevant costs for entering into the discount car
rental market in Tasmamia. The techniques used for analysing the proposed project include
payback period and net present value based on which it has been found that the project is
favourable for the organisation. However, if the sales revenue falls by 10%, there would be
considerable amount of loss. Hence, the management needs to take into account the other non-
financial aspects before undertaking the project.

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Table of Contents
Introduction:....................................................................................................................................3
1. Relevant and irrelevant costs for the project:..............................................................................3
2. Consideration of possible cannibalisation and opportunity costs:...............................................5
3. Determination of initial investment cash flow:...........................................................................5
4. Estimation of cash flows:.............................................................................................................6
5. Payback period of the project:.....................................................................................................7
6. Net present value of the project:..................................................................................................7
7. Sensitivity analysis through decrease in project sales by 10%:...................................................8
8. Recommendations:....................................................................................................................10
Conclusion:....................................................................................................................................10
References and Bibliographies:.....................................................................................................11

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Introduction:
In the current era, business organisations are often confronted with issues regarding
whether to undertake a particular project or investment, as they are not ensured about the
expected future benefits from the same. In this context, it is to be noted that the investment
appraisal techniques play a crucial role in determining the profitability of the proposed projects
or investments. It is deemed to be an integral part of capital budgeting, which could be applied to
the areas even when it is not easy to quantify the returns like training, personnel and marketing
(Andor, Mohanty and Toth 2015). The report deals with Tasmanian Motor Rental (TMR), which
is a proprietary firm in the car rental industry and it is considering whether to enter the discount
retail car market in Tasmania. The project would be evaluated firstly by identifying the relevant
and irrelevant costs with possible consideration of opportunity costs and cannibalisation. After
this, the annual cash flows of the project would be ascertained based on which the payback
period and net present value would be computed for the project. Finally, sensitivity analysis for
the project would be computed by reducing annual sales by 10% and accordingly, final
recommendation would be provided to the management of TMR.
1. Relevant and irrelevant costs for the project:
The costs, which are found to be relevant for the project, are summarised in the form of a
table as follows:

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From the above table, it could be stated all the costs are considered to be relevant for this
particular project. For funding this project, TMR have to purchase 100 cars for which they would
have to install lojack recovery system in the form of installation cost. The change in net working
capital is taken into account, as it needs to be invested at the start of the project. In addition, for
initiating this project, the organisation has to redevelop and renovate buildings for storing
vehicles. Therefore, these four costs are considered as initial investment for the project
(Chittenden and Derregia 2015).
The other costs are taken into consideration, as they have to be incurred each year over
the entire project life. These costs have to be deducted from sales from revenue to arrive at net
profit. The administrative costs are expected to increase by 20% on the current figure and hence
20% of additional costs are considered for this project. After depreciation back is added back
with net profit to arrive at operating cash flows, opportunity cost of loss of lease income is
subtracted for arriving at the net cash flows, which include addition of salvage value and initial
working capital to be recovered at the end of the project life.

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2. Consideration of possible cannibalisation and opportunity costs:
Cannibalisation is a situation, in which the acceptance of a new project minimises the
cash flows of an ongoing project. For undertaking sound capital budgeting decisions, the
organisations are needed to take into account accurately the impact of cannibalisation in
computing measures like payback period, net present value, internal rate of return, profitability
index and others (Daunfeldt and Hartwig 2014). On the other hand, opportunity costs denote the
forgone value for undertaking one specific investment, instead of making investment in another
project. Thus, it assists in making sound decisions related to production, time management and
capital allocation (De Andrés, De Fuente and San Martín 2015). In this analysis, the
consideration of possible cannibalisation and opportunity costs is made in the following ways:
 Opportunity cost of loss of lease income has been taken into account in the form of
negative cash flows.
 Initial working capital is taken into account as negative cash flow in initial investment.
 The release of working capital is taken into consideration in the form of positive cash
flow at the end of the project.
3. Determination of initial investment cash flow:

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4. Estimation of cash flows:
In order to estimate the cash flows of the project for TMR, certain aspects have been
taken into consideration. The operating variable cost is estimated to be 10% of the total revenue.
In case of administrative cost, it is estimated the cost would be increase by 20% more than the
existing amount of $550,000 per annum. Therefore, only 20% increase has been taken into
consideration. For depreciation expense, it is calculated by taking into account the salvage value
of the business estimated to be sold at $1,000,000 at the end of the project life. Therefore, the
salvage value is deducted from the cost of cars and installation expense of Lojack recovery
system and the value obtained is divided by the economic life of the project (5 years) to arrive at
the depreciation expense. The other costs identified above are considered as operating expenses
to arrive at profit before tax from which tax expense is deducted to calculate the operating cash
flows (De Souza and Lunkes 2016). After this, the opportunity cost of loss of income is deducted
after which salvage value and initial working capital are added with operating cash flows to
arrive at the net cash flows.

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5. Payback period of the project:
The above table mainly helps in representing the payback period of the proposed project
for TMR. In capital budgeting, payback period is defined as the time needed for recouping the
funds expended in a project or to arrive at the break-even point (Goel 2015). If the payback
period is lower than the economic life of the project, it is deemed to be favourable and vice-
versa. For this case, the payback period is lower than the estimated life of the project, which is
computed as 4.28 years. Hence, from the perspective of this method, the project has the ability of
yielding benefits to the organisation in the long-run. However, it has been argued that payback
period does not consider the time value of money and other inflationary factors that might
minimise the overall return on investment for the organisation (Johnson and Pfeiffer 2016).
6. Net present value of the project:

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The above table mainly helps in depicting the net present value (NPV) of the proposed
project for TMR. In this context, it needs to be mentioned that net present value is a method,
which contrasts the amount invested in the current date with the present value of the estimated
cash receipts in future from the investment (Kengatharan 2016). Another added benefit of this
method is consideration of time value of money and cost of capital, which assists in determining
the overall profitability on investment. A higher and positive value is always desirable, since it
would help in increasing the overall return on investment for the organisation (Mbabazize and
Daniel 2014). In this case, the NPV of the proposed project is calculated as $63,124, which
indicates the favourability of the project. This is because TMR would be able to make profit
from this particular project.
7. Sensitivity analysis through decrease in project sales by 10%:
In order to conduct sensitivity analysis, it is necessary to ascertain the revised cash flows,
as the net cash flows would decline with decline in revenue. The following table represents the
net cash flows of the project when sales decline by 10%:

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In addition to net cash flows, the payback period and net present value techniques are
applied to find out the profitability of the proposed project with decline in sales revenue. The
values of these techniques are presented in the form of a table as follows:
In accordance with the above table, it could be seen that although the payback period is
lower than the useful life of the project, the net present value is found to be negative at
($190,217). This clearly implies that if there is decline in sales revenue, TMR would not be able

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to enjoy the desired benefits from the project. Instead, the organisation could suffer significant
amount of loss by undertaking the project in such situation.
8. Recommendations:
By considering all the possible aspects, it is advised to TMR to accept the project, as it
would help in maximising its overall return on investment. However, if sales decline by 10%, the
project would result in considerable loss for the organisation. Therefore, before undertaking this
project, TMR needs to consider certain non-financial aspects like inflation, currency fluctuations
and other factors. Moreover, the management of TMR needs to set aside a contingency plan that
would help in dealing with certain unforeseen circumstances. If the factors are found to be
controllable, TMR needs to accept the project for increasing its overall profitability.
Conclusion:
Based on the above discussion, it has been found that TMR has considered all relevant
costs for entering into the discount car rental market in Tasmamia. The techniques used for
analysing the proposed project include payback period and net present value based on which it
has been found that the project is favourable for the organisation. However, if the sales revenue
falls by 10%, there would be considerable amount of loss. Hence, the management needs to take
into account the other non-financial aspects before undertaking the project.

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References and Bibliographies:
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of ‘rules of
thumb’in capital budgeting. The British Accounting Review, 47(3), pp.225-236.
Daunfeldt, S.O. and Hartwig, F., 2014. What determines the use of capital budgeting methods?:
Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4), pp.101-112.
De Andrés, P., De Fuente, G. and San Martín, P., 2015. Capital budgeting practices in
Spain. BRQ Business Research Quarterly, 18(1), pp.37-56.
De Souza, P. and Lunkes, R.J., 2016. Capital budgeting practices by large Brazilian
companies. Contaduría y Administración, 61(3), pp.514-534.
Goel, S., 2015. Capital budgeting. Business Expert Press.
Johnson, N.B. and Pfeiffer, T., 2016. Capital budgeting and divisional performance
measurement. Foundations and Trends® in Accounting, 10(1), pp.1-100.
Kengatharan, L., 2016. Capital budgeting theory and practice: a review and agenda for future
research. Applied Economics and Finance, 3(2), pp.15-38.
Mbabazize, P.M. and Daniel, T., 2014. Capital budgeting practices in developing countries: a
case of Rwanda. Res J Finance, 2(3), pp.245-260.
Nurullah, M. and Kengatharan, L., 2015. Capital budgeting practices: evidence from Sri
Lanka. Journal of Advances in Management Research, 12(1), pp.55-82.

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Rossi, M., 2014. Capital budgeting in Europe: confronting theory with practice. International
Journal of Managerial and Financial Accounting, 6(4), pp.341-356.
Wnuk-Pel, T., 2014. The practice and factors determining the selection of capital budgeting
methods–evidence from the field. Procedia-Social and Behavioral Sciences, 156, pp.612-616.