Investment Decision Project Evaluation

Investment decision -
project evaluation

INTRODUCTION
Corporate finance is the financing section which interacts with how companies
approach with sources of financing, capital structure and investment decisions (Johnson, 2019).It
main focuses mainly on optimizing shareholder interest through long-term and short-term
strategic preparation and the execution of various approaches. Capital expenditure initiatives
vary from business management operations to investment banking.
In this report, investment decision for Blue Mountain Ltd in order to introduce new product
is discussed. In addition, the part B of report describes the financial decision included dividend
and capital structure is elaborated.
PART A
Formula from excel:
Initial Investment
required
New Machine
1200000
0
Research 860000
Net working capital
requirement 600000
Advertising
campaign 2500000
Total
=SUM(C1
7:C20)
Years
Particulars 0 1 2 3 4 5 6 7
Initial investment =-C21
Sales revenue 2600000 4600000 6600000 8600000 10600000 10000000
96000
00
Less: Operating
expenses @23% =D25*-0.23 =E25*-0.23 =F25*-0.23 =G25*-0.23 =H25*-0.23 =I25*-0.23
=J25*-
0.23
Operating profit =D25+D26 =E25+E26 =F25+F26 =G25+G26 =H25+H26 =I25+I26
=J25+J
26
Less: Depreciation
-
1783333.3333333
3
-
1783333.33
333333
-
1783333.33
333333
-
1783333.33
333333
-
1783333.33
333333
-
1783333.33
333333
13000
00
Income after
depreciation before
interest =D27+D28 =E27+E28 =F27+F28 =G27+G28 =H27+H28 =I27+I28
=J27+J
28
Less: Interest -1160000 -1160000 -1160000 -1160000 -1160000 -1160000
-
11600
00
Income after
depreciation =D29+D30 =E29+E30 =F29+F30 =G29+G30 =H29+H30 =I29+I30
=J29+J
30
Income tax @ 30% =D31*-0.3 =E31*-0.3 =F31*-0.3 =G31*-0.3 =H31*-0.3 =I31*-0.3
=J31*-
0.3
Income after tax
and depr. =D31+D32 =E31+E32 =F31+F32 =G31+G32 =H31+H32 =I31+I32
=J31+J
32
Add: Depreciation
1783333.3333333
3
1783333.33
333333
1783333.33
333333
1783333.33
333333
1783333.33
333333
1783333.33
333333
Net Income =D33+D34 =E33+E34 =F33+F34 =G33+G34 =H33+H34 =I33+I34 =J33+J

34
Add: Additional
revenue after tax 1160000 1160000 1160000 1160000 1160000 1160000
11600
00
Total Income =D35+D36 =E35+E36 =F35+F36 =G35+G36 =H35+H36 =I35+I36
=J35+J
36
Net Present value
@10% 1.1 =D39*1.1 =E39*1.1 =F39*1.1 =G39*1.1 =H39*1.1
=I39*
1.1
Cash flows at NPV =D37/D39 =E37/E39 =F37/F39 =G37/G39 =H37/H39 =I37/I39
=J37/
J39
Cumulative cash
inflows =C24+D40 =D41+E40 =E41+F40 =F41+G40 =G41+H40 =H41+I40
=I41+J
40
Internal rate of
return @20.107% 1.20107 =D42*D42 =E42*D42 =F42*D42 =G42*D42 =H42*D42
=I42*
D42
Cash flows at IRR =D37/D42 =E37/E42 =F37/F42 =G37/G42 =H37/H42 =I37/I42
=J37/
J42
Cumulative cash
inflows =C24+D43 =D44+E43 =E44+F43 =F44+G43 =G44+H43 =H44+I43
=I44+J
43
Profitability Index = Present values of future cash flows / Initial Investment
=
=(SUM(D40:J40))/
15960000
Payback period =
=4+(3999150.06/
4095845.42)
= Approx. 5 years
Net Present Value
Net present value shows the value of future cash inflows based on present date through
discounting at specific rate. In this case cash flows for over 7 years have been discounted by
assuming 10% as discounted rate. As in this case; there are no other alternate projects hence
positive NPV is good for business and hence, this project can be selected.
Internal Rate of Return
IRR shows minimum rate of return company requires paying its weighted average cost of capital.
Hence, if IRR is greater than WACC, refuse the project and if it is below WACC than accept the
project. The calculation of IRR has been done through trial and error method.
In this project; WACC is 7.5%, while IRR shows 20.107% which is much higher than WACC.
Thus project should be refused. But WACC has to be paid by business every year; while IRR
calculated only for 7 years. Therefore project could be accepted if the life span will be extended.
Profitability Index
This index shows whether the business has positive or negative future cash inflows compare to
initial investment. PI above 1 indicates positive cash flows and hence acceptable; while PI below
1 shows negative cash flows and should be rejected.
In this case; PI = 1.43 which is much higher than 1; therefore project is acceptable.