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Making Choice Between Q Power Boat and S Powerboat

   

Added on  2021-06-17

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Report for making choice between Q power boat and S powerboatExecutive summeryIf organization need to make a decision regarding acceptance or nonacceptance then net presentvalue technique conclude whether the project is eligible to create wealth or not. Internal rate ofreturn technique calculates return percentage from the future expected cash flows. Discountpayback technique calculates the period in which discounted cash inflows from the organizationcould generate initial cash outflows. This report is written for focusing these techniques andmaking results of decision making.IntroductionQ power boat and S power boat are two projects under consideration which require similar initialand terminal cash flows. However, operating cash flows for the project is different. In addition tothis, some other qualitative aspects are also different. This report is written for providing aconclusion for making choice between Q power boat and S power boat after consideringqualitative and quantitative aspects. Quantitative aspects are tested by making use of capitalbudgeting techniques.Quantitative FindingsCapital budging techniques are used and implemented for managerial decision making. Thesetechniques are helpful in finding more beneficial project under two or more project and it alsoconcludes whether a project should be accepted by the organization or not [ CITATION Ros15 \l1033 ]. Capital budgeting techniques which used for making analysis under consideration are netpresent value, internal rate of return and discounted cash flow.Moreover, if the organization needs to make the decision for making choice between two ormore projects then net present value technique conclude which project is eligible to createmaximum wealth for the organization. This technique calculates surplus or deficit of presentvalue of future expected cash inflows over future expected cash outflows from the project.Furthermore, if the organization needs to make a decision regarding acceptance ornonacceptance then the internal rate of return technique conclude what return percentage can beprovided by the project. Additionally, if the organization needs to make the decision for makingchoice between two or more projects then the internal rate of return technique conclude whichproject is having more return percentages. Furthermore, discount payback technique calculates the period in which discounted cash inflowsfrom the organization could generate initial cash outflows. Project having higher discountedpayback period does not consider as an efficient project.
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Calculation of initial flowThe initial flow of the project includes the outflow due to plant cost i.e. $ 20,000,000, outflowdue to transportation and installment cost of the plant i.e. $ 800,000, initial outflow due toworking capital introduction is $ 700,000 and the cash inflow because of the debenture issue is $1,000,000. In this way, total initial cash outflow will be $ 11,500,000.Calculation of terminal flow After tax cash inflows due to sale of the plant will be $ 3,671,200, cash inflows due to the releaseof the working capital from the project at the end of the project will be equal to initial outflowfor working capital introduction i.e. $ 700,000 and cash outflow due to repayment of debentureswill be equal to the cash inflows due to debentures at the start of this project i.e. $ 1,000,000. Inthis way, total terminal cash outflow will be $ 5,628,800.Calculation of operating flowYear123456RevenueQ-powerboatsale$ 19,500,000 $ 18,000,000 $ 16,500,000 $ 15,000,000 $ 13,500,000 $ 12,000,000Power board parts revenue $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 $ 500,000 Total revenue $ 20,000,000 $ 18,500,000 $ 17,000,000 $ 15,500,000 $ 14,000,000 $ 12,500,000Less: costsVariable cost $ 7,800,000 $ 7,200,000 $ 6,600,000 $ 6,000,000 $ 5,400,000 $ 4,800,000 Variable costparts $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 Depreciation expenses $ 2,496,000 $ 2,496,000 $ 2,496,000 $ 2,496,000 $ 2,496,000 $ 2,496,000 Fixed factoryoverhead $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 $ 200,000 Interest expenses $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 $ 1,000,000 Opportunity cost $ 120,000 $ 120,000 $ 120,000 $ 120,000 $ 120,000 $ 120,000 Total costs $ 11,816,000 $ 11,216,000 $ 10,616,000 $ 10,016,000 $ 9,416,000 $ 8,816,000 Operating profit $ 8,184,000 $ 7,284,000 $ 6,384,000 $ 5,484,000 $ 4,584,000 $ 3,684,000 Tax expenses $ 2,455,200 $ 2,185,200 $ 1,915,200 $ 1,645,200 $ 1,375,200 $ 1,105,200 Profit after tax $ 5,728,800 $ 5,098,800 $ 4,468,800 $ 3,838,800 $ 3,208,800 $ 2,578,800
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Add: Depreciation $ 2,496,000 $ 2,496,000 $ 2,496,000 $ 2,496,000 $ 2,496,000 $ 2,496,000 Total After tax operating cash flow $ 8,224,800 $ 7,594,800 $ 6,964,800 $ 6,334,800 $ 5,704,800 $ 5,074,800 Calculation of total after tax cash flow and the present value of that cash flows at 20% discountrate from Q powerboatYearInitial flowOperating flowTerminal flowTotal cash flowsPresent value0$ (11,500,000)$ (11,500,000) $ (11,500,000.00)1$ 8,224,800$ 8,224,800$ 6,854,000.002$ 7,594,800$ 7,594,800$ 5,274,166.673$ 6,964,800$ 6,964,800$ 4,030,555.564$ 6,334,800$ 6,334,800$ 3,054,976.855$ 5,704,800$ 5,704,800$ 2,292,631.176$ 5,074,800$ (5,628,800)$ (554,000)$ (185,533.48)Net present value of the capital budgeting project is the sum of all cash inflows and cashoutflows at the present value of such cash inflows and outflows. In the calculation of net presentvalue firstly organization needs to make the calculation of after-tax cash flows from the projectthen after needs to calculated present value interest factors at the weighted average cost of capitalof the organization. Such present value interest factors need to apply to after-tax cash flows andthe sum of such after-tax cash flows known as the net present value of the organization’s projectunder consideration. Higher net present value of any project is more liked in comparison to theproject having lower net present value [ CITATION Abo171 \l 1033 ].The internal rate of return on any project is a return rate at which net present of the organizationbecome zero. It is the rate of return provided by the project to the organization. The internal rateof return for the project having life more than 2 years can only be calculated by using hit andtrial method or using excel spreadsheet calculations. A project having a higher internal rate ofreturn is assumed as a better project and accepted by the organization over the project having alower internal rate of return.The payback period of any project is a period in which initial after-tax cash outflows of theorganization can be paid by the project by providing further cash inflows from the project. Aproject having lower payback period is acceptable by the organization over the project having alonger payback period. The discounted payback period of the project is a period in which initialafter-tax cash outflows of the organization can be paid by the project by providing further cashinflows from the project at their present value. A project having lower discounted payback
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