Project Planning and Capital Budgeting Essay

   

Added on  2020-06-04

13 Pages3552 Words155 Views
Justify and validate whether or not toproceed with one of two mutually exclusiveprojects (Project A or Project B)
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Table of ContentsEXECUTIVE SUMMARY.............................................................................................................1Business and project overview.....................................................................................................1P&L statement and cash flow statement......................................................................................2Discounting rate...........................................................................................................................3Capital budgeting analysis...........................................................................................................4CONCLUSION................................................................................................................................9LIST OF REFERNCES.................................................................................................................10INDEX OF TABLESTable 1 Profit and loss statement of Project A................................................................................2Table 2Profit and loss statement of Project B.................................................................................2Table 3 Cash flow statement for Project A......................................................................................2Table 4Cash flow statement for Project B.......................................................................................3Table 5 Calculation of net present value for project A....................................................................5Table 6 Calculation of net present value for project B....................................................................5Table 7 Calulation of payback period for project A........................................................................6Table 8 Calulation of payback period for project B........................................................................6Table 9 Calculation of internal rate of return for project A.............................................................6Table 10 Calculation of internal rate of return for project for project B.........................................7Table 11 Calculation of accounting rate of return for project A.....................................................7Table 12 Calculation of accounting rate of return for project B......................................................8Table 13 Calculation of profitability Index for project A................................................................8Table 14 Calculation of profitability Index for project B................................................................8
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EXECUTIVE SUMMARYIn business world, many-times, firm need to incur capital expenditures to purchase newmachinery, property, plant, acquire new technology, expansion projects and other. All of suchprojects need huge capital; therefore, rational decisions needs to be made, otherwise,inappropriate decisions may bring business into significant trouble. Capital budgeting also calledinvestment appraisal methods are used by companies to judge how well various projects seemsviable and justifiable for the enterprise and found acceptable (Baum and Crosby, 2014). TissueCo. is a private firm that gained success in the market by producing & selling toilet paper frompast 10 year. Currently, it is looking to add a new product to its existing offerings but firm haslimited capital. Therefore, out of two project proposals, A & B, business can only put money inone of these which seems more worthy. Thus, the aim of the report is to apply investmentappraisal techniques like ARR, payback, internal rate of return and Net present value to choosethe best one. After applying the necessary capital budgeting techniques, project A found worthydue to greater NPV, IRR above the cost of capital and higher profitability Index. Despite this,payback period method discovers quick recovery of initial investment in project A. Hence, it isbetter to recommend Tissue Co. to undertake investment in project A.Business and project overviewCompany has two proposals available presented by Manager A and Manager B. Project Ais about launching just a fragranced toilet paper and current procedure followed by Tissue Co. isalready well arranged to produce such paper with the exception of slightly modifications and anew machine to add fragrance. In order to purchase new machinery, entity will need to arrangefunds worth $1.5 million which has no resale value and will be completely scrap after 5 year. However, project B is about launching a new kind of paper that is thicker and have a softsurface but will be disposed easily when it soaked in water. Thus, both the projects are differentfrom each other, as in first, Tissue Co. just need to purchase a new machine whereas in later, itwill also need to carry out research & development which costs $0.5 million to determine thatwhich kind of paper is in great demand in the market. However, new machine purchase willincur cost of $1 million. However, on the other side, fragranced toilet paper already exists inheavy demand. Despite this, manager B also believed that on such project, firm will also incur1
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considerable expense on product marketing to aware customers, as a result, in first two years, itwill generate lesser EBIT but after gaining reach in the market, it will become the first moverand enjoy the benefits of strong sales. P&L statement and cash flow statement Profit & loss statement presents the results of trading activities of the business unit. Itgives information about the cost incurred and revenue generated through the daily operations andactivities. The main objective of preparing P&L statement is to determine net result whetherbusiness operations would be profitable or loss occuring. It helps to know earnings beforeinterest & tax, earnings before tax and net return after payment of taxes as follows: Table 1 Profit and loss statement of Project AYear 12345Profits before depreciation 600700800700600Less: depreciation 300300300300300Earnings before interest & tax (EBIT)300400500400300Less: Interest @ 8%8080808080Earnings before tax (EBT)220320420320220Less: taxation @ 30%66961269666Earnings after tax (EAT) 154224294224154Table 2Profit and loss statement of Project BYear 12345Profits before depreciation 2802807001100400Less: depreciation 200200200200200Earnings before interest & tax (EBIT)8080500900200Less: Interest @ 8%8080808080Earnings before tax (EBT)00420820120Less: taxation @ 30%0012624636Earnings after taxation 0029457484Cash flow statement is different from the profitability statement because it does notincludes activities and events that does not affect cash availability. For instance, non-cash affectoperations like depreciation, loss & profit on sale, accruals are adjusted back to the net profit2
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