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Report Regarding the Choice of Project Pdf

   

Added on  2021-06-15

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Report regarding the choice of projectIntroductionCapital budgeting is a technique under which projected cash flows from the project underconsideration is used for making a calculation whether the project is feasible or not. In additionto this is technique is helpful in making choice between various projects under consideration.This report will provide conclusion whether Q powerboat project will be undertaken by theorganization or not. In addition to this, this report also makes a choice between Q powerboat andS powerboat.Q powerboat projectThis project is considered by the organization for making an investment by financing it fromdebt and equity sources of finance. Total after tax cash flows from this project is asunder,YearTotal after tax cash flowsPresent value of after tax cash flows0 $ (11,500,000.00) $ (11,500,000.00)1$ 8,224,800.00$ 6,854,000.002$ 7,594,800.00$ 5,274,166.673$ 6,964,800.00$ 4,030,555.564$ 6,334,800.00$ 3,054,976.855$ 5,704,800.00$ 2,292,631.176$ (554,000.00)$ (185,533.48)Calculation of these cash flows is given in the excel sheet annexure. Organization cost of capitalis 20%. At this cost of capital rate various capital budgeting techniques showing followingresults for this project,Net present value $ 9,820,796.77 The internal rate of return58.50%Discounted payback period2.14 yearsNet present value of the project shows the net after-tax cash flows from the project at theirpresent value. Positive net present value of the project is expected to create wealth for the project[ CITATION Rem95 \l 1033 ]. In the present case net present value is positive hence Q powerboatproject is acceptable.Moreover, internal rate of return of a project is a return rate which is expected to generate by theorganization from the project. If a project has an internal rate of return more than its cost ofcapital then the project is expected to provide higher returns than the cost, in turn, assumed as anacceptable project [ CITATION Ros15 \l 1033 ]. In the present case, such project is having aninternal rate of return more than maximum cost of capital i.e. 25%, hence from this perspectivealso this project is acceptable.
Report Regarding the Choice of Project Pdf_1

Furthermore, the discount payback period is a period in which project is expected to pay is initialcash outflows from the discounted cash inflows. Project having discount payback period lowerthan the acceptable discounted payback period is treated as an acceptable project. In the presentcase, Q powerboat project is having discount payback period i.e. 2.14 years lower than theacceptable discounted payback period i.e. 4 years hence this project is an acceptable project.Hence, all results from the all capital budgeting tests provide a certificate of the acceptableproject to the Q powerboat project. Therefore, from the quantitative perspective, this project isacceptable. However, this project is having a quantitative concern i.e. the boats manufactured under thisproject is expected to supply excessive carbon component to the water. Such excessive carboncomponent will become the reason behind the water pollution. Every organization has socialresponsibility of making sustainable development hence undertaking of this project is againstsuch social responsibility. In addition to this environment protection groups can make badpublicity of the project. Additionally, the government may set regulation for shut down theproject because of water pollution issues. Hence this project is having various qualitativeconcerns.S powerboat projectS power boat project is the similar project to the Q power boat project, however, this project willhave different operating cash flows and does not supply excessive carbon component to thewater. Hence management is also considering this project in place of Q power boat project. Moreover, net present value of operating cash flows from both project i.e. Q power boat projectand S power boat project is as follows,YearOperating cash flows from Q power boatOperating cash flows from S power boat1$ 8,224,800.00$ 6,400,000.002$ 7,594,800.00$ 7,400,000.003$ 6,964,800.00$ 7,900,000.004$ 6,334,800.00$ 8,600,000.005$ 5,704,800.00$ 9,300,000.006$ 5,074,800.00$ 11,100,000.00Cash flows from the Q power boat are showing declining trend however cash flows from the Spower boat is showing increasing trend. The present value of operating cash flows and netpresent values from these projects is as follows,At discount rate of 20%YearQ power boatS power boat1$ 6,854,000.00$ 5,333,333.33
Report Regarding the Choice of Project Pdf_2

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