Report on Business Finance

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Business Finance
Report
5/6/2018
Student Name

1 | P a g e Business Finance
Table of Contents
Introduction................................................................................................................................2
Questions....................................................................................................................................2
Q1. Non-discounted payback period......................................................................................2
Q.2 Profitability index............................................................................................................2
Q.3 IRR of the project............................................................................................................3
Q.4 NPV of the project...........................................................................................................4
Q.5..........................................................................................................................................5
Q.6..........................................................................................................................................5
Q.7..........................................................................................................................................5
Q.8..........................................................................................................................................6
Conclusion..................................................................................................................................6
Recommendation........................................................................................................................7
References..................................................................................................................................8
Appendices...............................................................................................................................10
Appendix 1...........................................................................................................................10
Appendix 2...........................................................................................................................10
Appendix 3...........................................................................................................................10
Appendix 4...........................................................................................................................11

2 | P a g e Business Finance
Introduction
The report discusses whether the Booli should expand its business operations or not.
For this following techniques have been used in the analysis. In the research, the capital
budgeting techniques have been discussed (Paseda, 2016). The aim of this report is to
identify the various techniques of capital budgeting to know how to accept or reject the
project. The criteria of choosing the proposal will be discussed in the report. Acceptance
and rejection of the project depend on its profitability and cost of the project. If the
profitability is high then the project is accepted by the company (Baker, Jabbouri &
Dyaz, 2017). The Booli electronics Company have to decide whether to go for the new
introduction in its project will be done by the company or not. The Company
profitability, internal rate of return, the payback period is discussed in the report.
Questions
Q1. Non-discounted payback period
A non-discounted payback period is a method which ignores the time value of money
in its calculation. This method assumes that there will be no earning after the project is
over. That means that non discounted payback period ignored the cash received after a
payback period of time (Chaysin, Daengdej & Tangjitprom, 2016). In Booli electronics,
the discounted payback period comes out to be 2.9 years (Refer Appendix 1). This shows
that the company can recover its cost in less time that is in nearly 3 years. The company
money is invested can come back in reasonable time. So the company can accept this
project and invest its funds.
Q.2 Profitability index

3 | P a g e Business Finance
Profitability index can be defined as an index which is highlighting the profits of the
company. It is a useful tool for ranking the various projects at a time. It allows
quantifying the profitability of all the available projects. Profitability index can be
calculated by summation of initial investment and Net present value divided by the initial
investment of the project. Higher the profitability index higher will be the profits. The
company will choose those projects which will have high profitability index (Esty,
2014). The profitability index can be calculated by this formula:
Profitability Index = Present value of Future cash flows
Initial Investment
OR
= (NPV+ initial investment)/Initial investment
If the profitability index is greater than 1 then, the project will be accepted by the
business and vice-versa. In Booli electronics, the profitability is coming out to be 1.97
times (Refer. 1.97 is more than one so the company will earn a profit in the new business
expansion. The project SSHA should be opted by the company as the profitability index
is more than 1.
Q.3 IRR of the project
Internal Rate of Return is the method used to calculate the rate of return of the
projects. The term internal here refers to that the factors affected this rate will be internal
this rate will not be influenced by the external factors. IRR is accepted when it is greater
than the Cost of a capital project (Daunfeldt & Hartwig, 2014). In Booli electronics the
IRR comes out to be 30.50 (Refer Appendix 3). The minimum required of return earned