Evaluation of Project: Capital Budgeting and Uncertainty Analysis

FINANCE
MEMORANDUM
STUDENT ID:
[Pick the date]

MEMORANDUM
FROM: STUDENT NAME
TO: CEO (Pinto Limited)
DATE: 18th May, 2018
SUBJECT: Evaluation of Project ( Strictly Confidential)
Dear Sir
In wake of the proposed that the company wishes to undertake, it is imperative to conduct
relevant analysis for determining the feasibility of the project in financial terms. This has
been carried out using the project cash flows related information already provided. The given
memo highlights the summary of the various analysis conducted in this regards besides,
providing a recommendation. For estimation of the incremental project cash flows and
further analysis, certain crucial aspects are outlined below.
1) External consultant has been invited for estimation of market demand of the product and a
fee has been paid in relation to the project. Even though this is related to the project but
still it has not been considered for computation. The main reason for the same is that this
expense cannot be recouped irrespective of the decision taken and hence is referred to as
sunk cost(Northington, 2015).
2) The premises for the project would be provided in the form of building owned by the
company which is at present rented to third party and thereby results in incremental rent
income to the tune of $ 250,000. The decision to undertake the project would amount to
loss of rental income and thereby this is a pivotal aspect included in project cash flows
(Parrino. and Kidwell, 2014).
3) Further, the assets related to the project in the form of equipment and plant are
depreciation to zero book value and do not have any salvage value, thus no cash inflow
would occur on account of this.
4) A key assumption underlying this analysis is that the cash flows related to the project are
arising only at year end and not in an intermediate manner (Damodaran, 2015).
Incremental Cash Flows
This has been captured in a tabular format indicated below.

Capital budgeting Indicators
Considering the above cash flows expected to arise from the given project, a summary table
of the capital budgeting measures has been prepared and highlighted as follows.
For the given base case considering the above values, the project is considered to be
acceptable as the following conditions are met (Brealey, Myers and Allen, 2014).
 NPV > 0
 IRR > Cost of Capital
 Payback period < Project Useful Life
 Discounted payback period < Project Useful Life
 PI > 1
Uncertainty Analysis