Analysis of Profitability of Investment in New Model for Smart Speaker and Home Assistant (SSHA)

Running head: BUSINESS FINANCE
Business finance
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Table of Contents
Introduction................................................................................................................................2
1. Non-discounted payback period.........................................................................................2
2. Profitability index...............................................................................................................3
3. Internal rate of return..........................................................................................................3
4. Net present value................................................................................................................3
5. Sensitivity analysis for price change..................................................................................4
6. Sensitivity analysis for price change..................................................................................6
7. Conclusion..........................................................................................................................8
8. Recommendation................................................................................................................8
Reference....................................................................................................................................9

2BUSINESS FINANCE
Introduction
Booli Enterprise that manufactures the electronic goods from its business location in
Victoria deals with the profitable product Smart Speaker and Home Assistant (SSHA) and
various other products. However, the company generates maximum amount of revenue from
sales of SSHA and over the past few year the sale for the same is excellent. However, to
improve the technology and add some more features to the existing SSHA model, the
company is planning to manufacture a new model for SSHA. This report will focus on the
profitability of the investment that will be made to manufacture new model for SSHA. For
the purpose of analysis various methods like profitability index, net present value, payback
period, internal rate of return will be used. Further, the report will analyse the sensitivity of
the investment’s net present value with regard to the changes in the selling quantity and
selling price of new SSHA model (DeFusco et al. 2015).
1. Non-discounted payback period
The non-discounted payback period method under capital budgeting does not take
into consideration time value of the money. To be more specific, value of each dollar that is
earned on the investment is expected to be of same value. Payback method calculates number
of years required for returning the cash equal to the amount of investment. However, the
method does not give any importance to the amount received after the payback period
(Gorshkov et al. 2014).
Non-discounted payback period for the project –
Year Cash inflow Cumulative cash flow
0 $ (47,025,000.00)
1 $ 9,158,160.00 $ 9,158,160.00
2 $ 34,307,097.60 $ 43,465,257.60

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3 $ 25,842,344.45 $ 69,307,602.05
4 $ 16,194,120.97 $ 85,501,723.02
5 $ 23,547,757.33 $ 109,049,480.35
Non-discounted payback period = 2 + (47,025,000 – 43.465,257.60) / (69,307,602.05 –
43,465,257.60) = 2.14 years.
2. Profitability index
It is the index that recognizes the relationship among the benefits and costs of the
investment that is calculated through dividing the present value of the future cash flows by
the amount of initial investment. It is also used to rank the project as it enables to quantify the
value generated for per unit of the investment (Pasqual, Padilla and Jadotte 2013).
PI = PV of future cash flows / Initial investment
PI = $ 77,573,881.43 / 47,025,000 = 1.65
Hence, the PI of new SSHA model is 1.65.
3. Internal rate of return
Internal rate of return or IRR is the capital budgeting metric that is used to measure
the profitability of the investment. It is the discount rate at which the cash inflows of the
project are equal to the cash outflows. In other words, the net cash flows become zero. IRR
depends on the same formula that is used for the calculation of NPV (Goodman et al. 2013).
As per the calculation in Excel, the internal rate of return for the project comes as 19.77%.