Project Feasibility Analysis

This assignment evaluates the feasibility of two distinct projects within a managerial finance context. The first project involves securing a loan, while the second focuses on purchasing machinery. The analysis encompasses financial metrics like Net Present Value (NPV), Internal Rate of Return (IRR), accounting rate of return, and profitability index for the loan project. For the machinery project, it delves into net cash flow after tax, NPV, and sensitivity analysis to determine its viability.

Managerial Financing
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Table of Contents
INTRODUCTION...............................................................................................................................4
TASK 1 Calculation of project 1.........................................................................................................4
1.1 Loan repayment Schedule ......................................................................................................4
TASK 2................................................................................................................................................8
2.1 Net cash flow after Tax.............................................................................................................8
2.2 Calculation of NPV and decision..............................................................................................9
2.4 Short report explaining calculation of relevant net cash flows after tax, justifying selection of
cash flows......................................................................................................................................10
SUMMERY.......................................................................................................................................10
References..........................................................................................................................................11
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3

INTRODUCTION
Managerial financing is a branch of financing that is in itself related with various financial
techniques. It focus on calculation and assessment rather then techniques(Osborne, M.J., 2010). So
in this project two cases have been concluded in first project a report on Polycorp is considered as
an investment of $3.25 million and needed a loan of $2 million. So in this report and as per given
data its repayment schedule is included. Furthermore NPV, IRR, AE or equivalent for the project is
calculated. Payback period, method and discounted payback, ARR and Profitability Index, and as
per results project accepted or not is analysed and treatment of salvage value and loan repayment
has been included.
In project two new machinery a proposal is made to purchase new machinery. As per given
data a research and calculation is made to calculate net cash flow after tax. NPV of project is
analysed and also sensitivity analysis is made by changing its cost of capital rate from 14.65% to
15.5% and analysis of change in rate have been included likes its effect of change compared to
actual output. And lastly all calculations are explained in brief whic help mangers of Polycorp Ltd.
to accept project or not.
TASK 1 CALCULATION OF PROJECT 1
1.1 Loan repayment Schedule
Amortisation schedule is a table which is detailed how to pay loan specially mortgage or in
instalment payment system. It refers to process which is repayment of debts along with interest. So
in this chart a portion of payment is settled toward both remaining interest and capital amount to be
paid. Over a period of time as instalment deposits interest on due amount decreases and capital
balances.
P
mt
No
.
Payment
Date
Beginning
Balance
Schedule
d
Payment
Extra
Paymen
t
Total
Payment Principal Interest
Ending
Balance
Cumulat
ive
Interest
1
02/05/20
18
$20,00,00
0.00
478026.4
13956006 0 478026.41
353026.4
1 125000
1646973.
58604399 125000
2
02/05/20
19
16,46,973.
59
4,78,026.
41 -
4,78,026.4
1
3,75,090.
56
1,02,935.
85
12,71,883
.02
2,27,935.
85
3
02/05/20
20
12,71,883.
02
4,78,026.
41 -
4,78,026.4
1
3,98,533.
73 79,492.69
8,73,349.
30
3,07,428.
54
4

4
02/05/20
21
8,73,349.3
0
4,78,026.
41 -
4,78,026.4
1
4,23,442.
08 54,584.33
4,49,907.
21
3,62,012.
87
5
02/05/20
22
4,49,907.2
1
4,78,026.
41 -
4,49,907.2
1
4,21,788.
01 28,119.20 0.00
3,90,132.
07
1.2 NPV of the project
NPV is method used in capital budgeting in analysing a project's cash inflow and cash
outflow. Profitability of project or investment of project is calculated in NPV(Ruan, D. and Tolga,
E., 2002). Using NPV formulae if a project gives positive result more then the invested project then
the project is accepted. Or in simple term the project having positive value will give a profit in
project while value with negative will give a loss in a project(Flanagan, J., 2015).
Year Cash Flow Principal Interest
Salvage
Value Net cash flow DF@12.05%
Discounted
cash flow
1 920000 353026.41 125000 0 441973.59 0.8925 394443.18
2 875000 375090.56
102935.8
5 0 396973.59 0.7965 316182.55
3 895000 398533.73 79492.69 0 416973.58 0.7108 296396.42
4 955000 423442.08 54584.33 0 476973.59 0.6344 302584.65
5 925000 421788.01 28119.2 225000 700092.79 0.5662 396365.91
Total CF 1705972.71
Total
Investment 3250000
-1544027.28
1.3 IRR of the project
It is alternative tool of NPV where calculation follows same formulae with slight change. It
sis calculated in neutral NPV or present value of project is zero and rate of return is discounted at
present value and whole projects present value become zero. It is also used as measuring
profitability of current project same like NPV by putting NPV is at zero and discounted at rate of
return(Thompson, B., 2015). The higher the IRR the the more profitable the project. If IRR is
negative it shoul be rejected.
-3250000
1
441973.5860
43994
2 396973.59
3 416973.58
4 476973.59
5 700092.79
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IRR Of
Project -8.31%
1.4 AE annual equivalent of the Project
Equivalent annuity cash flow is method used in capital budgeting to compare two project's
profitability of future value. The equivalent annual annuity approach calculates the constant annual
cash flow generated by projects over life period of project if it was annuity. When used to compare
project with unequal lives. The project having higher EAA should be selected.
Formulae of EAA is c = (r*NPV)/(1-(1+r)^-n)
where c= equivalent annual cash flow,
NPV= Net present Value
r= interest rate per period
n= number of periods
c= (.1205*-1544027.28)/1-(1+0.1205)^-5
= -428858.87
1.5 PB, the payback and discounted payback in years
payback period is period or time required to recover cost of capital. Payback period of given
project is calculated and efforts are tried to keep these period as short as possible. So in general
term the longer Payback period the project is rejected and shorter payback period the project is
accepted. The main important point to consider in it is it ignores time value of money unlike, other
method of capital budgeting method. Like NPV, IRR, Discounted cash flow.
Initial
Investment -3250000 Payback period
1 441973.59 -2808026.41
2 396973.59 -2411052.82
3 416973.58 -1994079.24
4 476973.59 -1517105.65
5 700092.79 -817012.86
Discounted Payback: It is also used to determine profitability of project. A discounted pay back is
method to discount future cash flow and recognising time value of money. For calculation a
project is accepted if the discounted payback period is less then targeted period. If result is more
then it is rejected.
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Total
investment -3250000
Discounted
payback
1 394443.18 -2855556.82
2 316182.55 -2539374.27
3 296396.42 -2242977.85
4 302584.65 -1940393.20
5 396365.91 -1544027.29
1.6 ARR of the project: Accounting or Average rate of return is financial ratio or percentage used in
capital budgeting. It does not consider time value of money which means where a present value of
money is more then the future value of money. It is calculated as average of total of net cash flow
and divided by Initial investment. So A project will give average return as percentage at the end of
each year.
3250000
1 441973.59
2 396973.59
3 416973.58
4 476973.59
5 700092.79
SUM 2432987.14
AVERSAGE 486597.43
ARR 14.97%
1.7 Present Value index or profitability index
Profitability index also known as Profit or value investment ratio. It is important tool can be
used to give a ranking of the project because it allow to create a per unit value of investment going
to be made in project. cash flow calculated does not included the initial investment of the project.
So any lower value of the project then it is assumed that present value of project is less then future
value of project. And if higher the value the present value is more then future value.
range of Profitability is
 If PI>1 then project is accepted.
 If PI<1 then project is rejected.
Profitability index is present value of future cash flow/ initial investment so
PI= 1705972.71/3250000 = 0.524914681
1.8 Brief explanation
As per given data analysis and calculation of various tools such as repayment or
amortisation schedule,NPV, IRR, Annual Equivalent of Project, PB ratio and discounted pay back,
Present Index, the project should be rejected because:
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NPV: After calculating net cash flow and discounted cash flow at 12.05% the NPV of
project after subtracting from initial investment is -1544027.28. So as per figure it is rejected.
IRR: After calculating Net cash flow and calculating with initial investment it is -8.31%.
So to accept irr should be positive and more then interest rate so it is rejected.
AE of project: Higher the Equivalent Annuity cash flow the project is profitable so it must
be higher and positive to accepted as compare to another, So here it is -428858.87. So it is rejected.
Payback and discounted payback Period: As per its calculation
In payback all five years It is continuous negative and lastly in 5th yr it is -817012.
In discounted pay back: Same tend in figure found with negative and for fifth yr it is -1544027
hence it is not acceptable or rejected.
ARR: In ARR the result after calculation is 14.97% so as above figure is negativeit is
rejected.
PI or present value index: In PI the value of project is 0.524914681 which is less then one
so it is rejected. If value is more then one then it is accepted.
TASK 2
2.1 Net cash flow after Tax
Net cash flow after tax(CFAT) is a measuring tool that measure the financial performance
that look at companies ability to generate cash flow through it various operations and process. It is
calculated as adding like amortisation+ depreciation + net income+ other non cash- cash charges. It
is measured to know whether company have ability to generate cash flow in given investment or it
require additional capital to growth or expansion of business or business project(King, R.G. and
Levine, R., 1995).
Calculation of cash flows
Particulars
Cash
outflow Year 1 Year 2 Year 3
Beginning investment 1955000
Working capital (CA) 96000
Pilot market study 149000
No. of Units 40000.00 42000.00 44100.00
Selling price 142.00 142.00 142.00
Total sales 5680000.00 5964000.00 6262200.00
Cash outflows
Cash operating expenses 4544000.00 4771200.00 5009760.00
Marketing and administration
cash outflows 178000.00 178000.00 178000.00
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Head office administration costs 139500.00 139500.00 139500.00
Depreciation 554666.67 554666.67 554666.67
Total expense 5416166.67 5643366.67 5881926.67
Profitability 263833.33 320633.33 380273.33
Less: taxation (28%) 73873.33 89777.33 106476.53
Net profit after taxes 189960.00 230856.00 273796.80
Add: Depreciation 554666.67 554666.67 554666.67
Add; Investment allowance
(25%) 2200000 488750.00 488750.00 488750.00
Resale value of assets cost 291000.00
Resale value of working capital 76000.00
Net cash flows 1043416.67 1043416.67 1410416.67
2.2 Calculation of NPV and decision
It is measurement of performance of particular business project and profitability tools used
in capital budgeting (Gitman, L.J. and Zutter, C.J., 2012). In it cash flow is discounted on rate of
cost of capital and then multiplied by discounted flow and totalled DF is subtracted by initial
investment then NPV is generated. If value is positive then accepted and if value is negative then
rejected.
DF @
14.65% DCF
Begining investment -2200000
1
1043416.66
666667 0.8722
910088.675
679604
2
1043416.66
666667 0.7608
793797.362
127871
3
1410416.66
666667 0.6636
935890.963
818498
IRR 25.72%
2639777.00
162597
-2200000
NPV 4839777
As per above data NPV is positive and 4839777 which is more as compared to initial investment
hence it is accepted because it will definitely give positive growth in future. IRR is also positive
and is 25.72 hence it is accepted.
2.3 Sensitivity analysis:
Sensitivity analysis of project is if change in certain figure how much change in result
output or obtained result is how much contract or deviate of given project. So here we have
changed cash flow cost of capital from 14.65% to 15.5% so as per result Net present value
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decreased from 4839777 to 4800927 that means 39750 value decreased. This means if we increase
more cost of capital then NPV will more likely to decrease. As discounted factor will increase. So
to gain more return from project the minimise cost of capital as low as possible.
Sensitivity
analysis
Begining investment -2200000
DF @
15.5% DFC
1 1043416.67 0.87 903391.05
2
1043416.66
666667 0.75 782156.75
3
1410416.66
666667 0.65 915380.12
25.72% 2600927.93
-2200000
NPV 4800927.93
2.4 Short report explaining calculation of relevant net cash flows after tax, justifying selection of
cash flows
Net cash flow is calculated on the basis of Beginning investment+ initial working capital+
pilot market study and other cash inflow from sales are included. For cash outflow cash operating
expenses is calculated by total sales*0.8 given selling expenses and adding marketing+ head office
cost+ depreciation= total expenses. Then profitability is found by total sales- total expenses.
Taxation is calculated by profit*28% tax. Net profit after sales is profitability - tax. and
depreciation is added and allowance @ 25% is added. So in 3rd yr resale value and value of
working capital is added and finally Net cash flow is found(Bushuyev, S.D., 2015). Net cash flow
is in positive trend over a period of three year and project is accepted. Investment allowance given
@ 25% assumed for all the three year and have been calculated as per case study.
SUMMERY
This project is managerial financing based and it this project two projects one with loan
regarding and feasibility and other with purchase of machinery related have discussed. In first
project the amortisation value of loan is calculated. After it NPV, IRR, AE, PB method or
discounted PB, ARR or accounting rate of return, Profitability index etc. have been included. So as
per calculation the project is rejected and It is not profitable investment for business.
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In second projects Net cash flow after Tax and its NPV and sensitivity analysis is made and
after result obtained the project is acceptable and have future return tendency and growth.
REFERENCES
Books and Journals
Osborne, M.J., 2010. A resolution to the NPV–IRR debate?.The Quarterly Review of
Economics and Finance,50(2), pp.234-239.
Kahraman, C., Ruan, D. and Tolga, E., 2002. Capital budgeting techniques using discounted
fuzzy versus probabilistic cash flows. Information Sciences,142(1), pp.57-76.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015.Principles of managerial finance. Pearson
Higher Education AU.
King, R.G. and Levine, R., 1995. Finance and growth: Schumpeter might be right. The
quarterly journal of economics108(3). pp.717-737
Musgrave, R.A. and Musgrave, P.B., 1973. Public finance in theory and practice.
Thompson, B., 2015. Cost of Capital and Economic Development: The Case of Ghana’s
Liberalized Capital Market. Journal of Finance and Bank Management. pp.1-10.
Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.
Musgrave, R.A. and Musgrave, P.B., 1973. Public finance in theory and practice.
Bushuyev, S.D., 2015. Project success analysis framework: A knowledge-based approach in project
management. International Journal of Project Management 33(4). pp.772-783.
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