Managerial Finance: Feasibility Analysis of Manufacturing Plant for Dell Inc

This report analyses the feasibility of setting up a manufacturing plant for Dell Inc through different investment appraisal techniques like IRR, payback period and NPV. It also evaluates the project's acceptability based on the new financial discipline adopted by the entity.

Running head: MANAGERIAL FINANCE
Managerial finance
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Executive summary
Primary purpose if this report is assisting Dell Inc in taking decision regarding start up its
manufacturing plant through analysing the feasibility of the project. Different method those will
be used by the analyst to evaluate the projects acceptability are internal rate of return, payback
period and NPV. Along with these approaches the project will also be analysed in context of
fulfilling the requirement of company’s financial discipline.

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Table of Contents
Introduction......................................................................................................................................3
Answer 1..........................................................................................................................................3
a. Yearly depreciation of plant.................................................................................................3
b. Cash flow for year 1 – 9.......................................................................................................4
c. Cash flow for year 0.............................................................................................................4
d. Cash flow for terminal year..................................................................................................5
e. Calculation and interpretation of NPV.................................................................................5
f. Payback period and IRR.......................................................................................................6
g. Applicability of discount rate...............................................................................................6
Answer 2..........................................................................................................................................7
a. Interest rate...........................................................................................................................7
b. Pros and cons of financial discipline newly applied.............................................................7
Conclusion and recommendation....................................................................................................7
Reference.........................................................................................................................................9

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Introduction
Finance division of Dell Inc is at present considering setting up manufacturing plant for
the laptops. In the 1st part of the report will basically analyse the proposed plant’s profitability
through applying various investment appraisal techniques. Different techniques those will be
used to evaluate the projects acceptability are IRR, payback period and NPV. In the 2nd part of
the report the project’s acceptability will be evaluated based on the new financial discipline
adopted by the entity. Based on entire analysis recommendation will be provided (Gorshkov et
al. 2018).
Answer 1
a. Yearly depreciation of plant

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b. Cash flow for year 1 – 9
c. Cash flow for year 0

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d. Cash flow for terminal year
e. Calculation and interpretation of NPV
In context of capital budgeting or while the project is analysed in term of its investment
amount and expected cash flows from the project, NPV is summing up all the expected cash
flows from the project including the negative one over the useful life of the project discounted at
required return rate or capital cost. NPV approach is considered better as it considers the time
value of money that is the money worth today will be lower at future period. Positive NPV tells
that the project is profitable and shall e accepted whereas the negative NPV tells the project is
not profitable and shall not be accepted (Žižlavský 2014). From the calculation in excel it can be
found that the proposed manufacturing plant’s NPV is $ 258,659,222.81. Positive NPV of the
plant is suggesting that the manufacturing plant shall be proceeded with.

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f. Payback period and IRR
Payback period tells the time period that will be required by the plant to recuperate the
initial investment made for the same. Generally, the projects with shorter payback period are
preferred as the company will be able to invest the same amount to any other more profitable
project. However, the basic requirement is that the payback period shall be less than the useful
life of the project (Leyman and Vanhoucke 2016) From the calculation in excel it can be found
that the both discounted and simple payback period of the plant is less than 10 years that is the
useful life of the project. It is suggesting that the manufacturing plant shall be proceeded with.
IRR measures the rate at which the NPV of the project is zero. IRR more than the cost of
capital suggest that the project is profitable whereas IRR less than the cost of capital suggest that
the project is not profitable (Mellichamp 2017) From the calculation in excel it can be found that
the IRR of the proposed manufacturing plant is 26% which is more than it cost of capital that is
16%. It is suggesting that the manufacturing plant shall be proceeded with.
g. Applicability of discount rate
While the discount for any project is applied major components those are considered are
the risk factor associated with project and the time value of money considering inflation rate and
market scenario. Hence, for each of the project its discount rate is different that is selected on the
basis of its risk factor and associated other factors. Hence, the entity shall not use the same
discount rate for all the projects in the category as it will not provide appropriate result (Magni
2016)

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Answer 2
a. Interest rate
As per the new financial discipline the project shall have sufficient cash flows to meet the
interest payment along with principle payment in case the entire requirement of $ 600 million is
raised through borrowing. Hence the lowest cash flow in the 8th year shall be considered for
verifying the new financial disciplines fulfilment as follows –
It can be observed from calculation that the company can pay maximum 15% rate of
interest on borrowing if entire requirement is raised through borrowing.
b. Pros and cons of financial discipline newly applied
Major pros of the system is that for all the year of the plant’s useful life or for the entire
loan period that is for entire 10 years the company will never fall short of money for meeting up
its interest obligation along with principle payment. On the other hand, con of the new system is
the decision will be taken solely on the basis of assumption as the cash flows are simply
projection. Hence, it may not match with actual cash flow and the company may fall short of
amount for meeting up the interest obligation along with principle payment
Conclusion and recommendation
From the above it can be concluded that the project is satisfying all the requirements for
its acceptance. Hence, it is recommended that Dell Inc shall proceed with the manufacturing

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plant. Further, in context of new financial decision it is recommended that the entity shall
consider other associated factors like demand, inflation and interest rate.

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Reference
Gorshkov, A.S., Rymkevich, P.P., Nemova, D.V. and Vatin, N.I., 2014. Method of calculating
the payback period of investment for renovation of building facades. Stroitel'stvo Unikal'nyh
Zdanij i Sooruzenij, (2), p.82.
Leyman, P. and Vanhoucke, M., 2016. Payment models and net present value optimization for
resource-constrained project scheduling. Computers & Industrial Engineering, 91, pp.139-153.
Magni, C.A., 2016. Capital depreciation and the underdetermination of rate of return: A unifying
perspective. Journal of Mathematical Economics, 67, pp.54-79.
Mellichamp, D.A., 2017. Internal rate of return: Good and bad features, and a new way of
interpreting the historic measure. Computers & Chemical Engineering, 106, pp.396-406.
Žižlavský, O., 2014. Net present value approach: method for economic assessment of innovation
projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.