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Assignment on Financial Management (pdf)

   

Added on  2021-06-18

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FINANCIALMANAGEMENTSTUDENT ID:[Pick the date]
Assignment on Financial Management (pdf)_1

RecommendationAs per the information provided, it is apparent that the business currently has a warehousewhich is running at 100% capacity and hence customers have to be turned away routinely.There is a proposal to develop a new warehouse on the adjacent land block that also belongsto the business. The objective of this analysis is to provide recommendation to theshareholders with regards to the warehouse project on the basis of NPV analysis. The keyassumptions and working for computation of NPV are summarised below.1)An assumption has been made that in case of rejection of warehouse project, immediateliquidation of land would be done. However, in case of proceeding with the project, theland would be sold only after five years.2)No interest payments or loan repayments have been represented in the computation ofNPV as the rate of return is supposed to reflect the underlying cost of financing of theproject.3)The cost to company for Jacob’s foreign trip has not been considered since it is a sunk costwhich cannot be recouped even if the warehouse project is scrapped.4)Another assumption made is that the extra amount put in as working capital for the newwarehouse will be recovered at the project end and hence during NPV computation, thecorresponding cash flow has been reflected.5)Also, it has been assumes that the incremental investment in the form of equipment andstructure erected would be sold once the project is finished and hence corresponding cashflows have been included in NPV computation.6)The old equipment whose book value is zero but market value $ 10,000 at t=0 is assumedto have zero market value at t=5. But still depreciation charged is zero since book value isalready zero.7)It has been assumed that all project related cash flows would occur only at year end andhence discounting has been done in accordance with the above assumption.For the proposed warehouse project, the computation of NPV has been indicated as shownbelow.
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In accordance with the NPV related calculations which are shown above, it is evident that theNPV for the new warehouse project is coming out to be positive. A positive NPV implies theeconomic feasibility of the project and the fact that undertaking the same would lead toincrease in shareholders’ wealth. Therefore, the new warehouse should be set up on thevacant land.
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