Managerial Finance Task 2: Project Evaluation - RWE Enterprises

Managerial Finance Task 2: Project Evaluation

Table of Contents
Part1: Project evaluation of RWE Enterprises.............................................................................2
A. Cash Flow of concerned project........................................................................................2
B. Explain Net present value.................................................................................................3
C. Calculate the internal rate of return and profitability index..............................................5
D. Calculate the payback period............................................................................................8
Part B: Evaluation of Projects......................................................................................................9
I. Determinate Payback period, net present value and internal rate of return..........................9
II. Evaluation of acceptability of the two projects...............................................................12
III. Rank the two projects and make a recommendation.......................................................14
References:....................................................................................................................................16

Part1: Project evaluation of RWE Enterprises
A. Cash Flow of concerned project
Cash flow: cash flow can be defined as a flow of cash from the activities of an organisation. All
transactions which affect the cash balance of a company included in cash flow statement.
Cash flow diagram of a concerned project denotes all possible outflows and inflows from a
project. The following table denotes the cash inflow and outflow of the project which is
concerning the RWE limited.
Particulars Amounts (AUD)
Initial Investment of project or outflow at o
year -3000000
Return in 1st Year 700000
Return in 2nd Year 700000
Return in 3rd Year 700000
Return in 4th Year 700000
Return in 5thYear 700000
year 5 ( investment at the end of 5th year) -2000000
Return in 6thYear 700000
Return in 7thYear 700000
Return in 8thYear 700000
Return in 9thYear 700000
Return in 10thYear 900000
Note: it is noted that at the end of 5th year, the company has to invest an additional amount of 2
million to continue the inflows from the project. Also at the end of project life, the company will
receive an additional amount from the scrape of machinery and other equipment so inflow of 10th
year will be 700000 + 200000 (Inflow + scrape value) = 900000.

B. Explain Net present value
Definition: In the context of an investment project, net present value can be defined as the
difference between present value of investment amount and the present value of possible
inflows.
A Fact about the money is that one dollar will not be able to purchase that thing after ten years
which it is able to purchase in current time and NPV is used to compute this difference (Weber,
2014). A reduction in the value of money arises due to the inflation rate and such inflation rate
decreases the buying power of money.
NPV has a solution for the same. Selection of a project generates outflow of resources in the
current year but possible benefits from selected project receive in subsequent years. So it is
necessary that organisation should calculate the NPV of the project to find out the profitability of
a project according to the inflation rate.
NPV = Present value of Investment (-) Present value of cash inflows
Advantage of NPV:
 To find the risk of an investment option (Woodruff, 2018)
 To find the profitability of a project according to the Time value of money.
 It clearly shows the value to be gained by the project so management can give an
explanation to the stakeholders on the basis of logical reason.
 Mostly cost of capital rate is used as a discount rate so it provides prevent from less
profitable investment options.
Disadvantages of NPV:
 All possible cash flows are estimated and there is no logical assurance about the receipt
of benefits.
 NPV is not a suitable measurement in that situation when investment value of two
projects different.
 NPV is also not suitable in the case of projects have different inflow life. For example, a
project with useful life five years and another project with useful life twenty years cannot
be appropriately measured on the basis of net present value (Woodruff, 2018).