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Investment Project Analysis

   

Added on  2020-01-07

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Strategic finance for managers1
Investment Project Analysis_1

Table of ContentsINTRODUCTION................................................................................................................................3Capital budgeting..................................................................................................................................3Calculation of NPV and IRR............................................................................................................3Interpretation..................................................................................................................................7Sensitivity analysis with change in tax rate, rate of return and price increase.................................8Decrease in discounting rates...........................................................................................................9Decrease in tax rate @ 25%............................................................................................................10Risk involved in investment appraisal............................................................................................11Question 1...........................................................................................................................................12Calculation of discounting rate.......................................................................................................12Calculation of payback period and net present value.....................................................................12Advise to FX about suitable project...............................................................................................14Financing through debt capital.......................................................................................................14Sensitivity analysis and its uses in project evaluation....................................................................15QUESTION 2.....................................................................................................................................15Incorrect items included in the list and its reasons.........................................................................16Omitted items in the list..................................................................................................................17Preparation of cash flow items.......................................................................................................17Calculation of NPV.........................................................................................................................18CONCLUSION..................................................................................................................................19REFERENCES...................................................................................................................................21APPENDIX........................................................................................................................................222
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INTRODUCTION Finance is regarded as the soul of the business because none of the entity can survive in the market without sufficient availability ofmonetary resources. It is the duty of finance manager to maintain adequate cash funds to support routine operations and manage business costthrough regular monitoring and controlling so as to make corporation financially strong. Financial manager are not only liable to administratedaily functioning but also need to monitor their capital expenditures because they have a huge impact on overall operations. Capital budgetingdecisions are of great significance as it enables manager to make viable and strategic decisions about investment in fixed assets. The presentproject report lay emphasizes on the application of different investment appraisal techniques, including both discounting and non-discountingmethods to make viable and qualitative investment decisions for the business success. Moreover, it also highlights the key factors that an entityshould address while considering to invest funds in any capital project. CAPITAL BUDGETINGEvery corporation needs to make long-term capital expenditures in the fixed assets, such as property, acquisition of new machinery, newplant, and designing new product etc. It requires huge amount of capital to invest in the assets and affect corporation to a large extent. Therefore,proper precautions should be taken while investing money in such kind of assets otherwise it may lead to business failure. In such regards, capitalbudgeting techniques helps establishments to determine the most suitable or appropriate investment project which will deliver greater return tothe organization (Echanis and Kester, 2016). These techniques are also known as project appraisal which is regarded as a process of evaluatingand examining relative profitability and return of each and every proposal so as to find out the best among these. In the given scenario, it hasbeen stated that Downhill Ski Tows Pty. Ltd operates ski tows and chair lifts at N.S.W. winter sort for a number of years. Due to sudden increasein skiers and sightseers, directors are considering to install a new ski run. There are number of appraisal methods available to the board membersto determine that whether this project will deliver sufficient yield or not in the future.Calculation of NPV and IRRNet present value: It can be computed by discounting all the forecasted cash flows at a cost of capital and total of it is subtracted from the3
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initial investment, called NPV. In case of a single project, if the total of discounted cash flows is higher than opening outlay than particularproject is considered worthy however, in case of negative results; management should not undertake the proposal. On the other hand, if there aretwo projects available than those options will be considered more viable, in which, there is maximum possibility of return (Net present value andinternal rate of return, 2012).Year 12345Revenue 2092500139500013950001436850739977.75Total cash inflow 2092500139500013950001436850739977.75Cost of engine, cables, pylons and fittings1200000Installation, clearing, earthworks and other installation cost 464000Annual replacement cost 1800018000180001800018000Depreciation on equipments 166400166400166400166400166400Wages and accommodation cost 3200022000220002200016000Accommodation and wages cost for new employees 270001800018000180009000Fuel and lubricants 157501050010500105005250Maintenance cost 31502100210021001050Clearing cost 3000030000300003000030000Advertisement, printing and administrative cost 8000800081608323.28489.664Total expenses300300275000275160275323.2254189.66Profit before taxes1792200112000011198401161526.8485788.09Tax payable 537660336000335952348458.04145736.43Profit after taxes 1254540784000783888813068.76340051.66Add: Depreciation 166400166400166400166400166400Net cash flow 1420940950400950288979468.76506451.66YearCash flowPV factor @ 15%Present Value4
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11420940.000.871235600.002950400.000.76718638.943950288.000.66624829.794979468.760.57560014.445506451.660.50251795.98Total present value3390879.15Less: Initial Investment-1664000.00Net present Value1726879.15Internal rate of return: It is another discounted technique at which both the total of discounted cash inflows and project cost becomesequal. Downhill Ski Tows Pty Ltd can compute IRR to examine the attractiveness of various proposals and chose the best among all. Theselection criteria of this technique demonstrates that if IRR of the proposal is greater than its cost of capital than such project can be accepted orvice-versa (Bennouna and et.al., 2010).. However, in case of more than one proposal, bigger IRR is considered more appropriate.Year Cash flow 0-166400011420940.002950400.003950288.004979468.765506451.66Internal rate of return61%Interpretation:According to the results obtained, it can be seen that NPV of new ski run is positive to $1,726,879.15 and IRR is 61%, higher than cost of capital of 15%, henceforth; it can be advised to the management that they should select the project. Thus, by installing new ski run Downhill Ski 5
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Tows Pty. Ltd can maximize their profitability and reach targets. Sensitivity analysis with change in utilization capacityIf capacity utilization in weekend goes down to 70% and 75% in the first and second year, than it influence on revenue, cash flows, NPV and IRR will be as follows: Year 12345Revenue 1957500135000013950001436850739977.75Total cash inflow 1957500135000013950001436850739977.75Cost of engine, cables, pylons and fittings1200000Installation, clearing, earthworks and other installation cost 464000Annual replacement cost 1800018000180001800018000Depreciation on equipments 166400166400166400166400166400Wages and accommodation cost 3200022000220002200016000Accommodation and wages cost for new employees 270001800018000180009000Fuel and lubricants 157501050010500105005250Maintenance cost 31502100210021001050Clearing cost 3000030000300003000030000Advertisement, printing and administrative cost 8000800081608323.28489.664Total expenses300300275000275160275323.2254189.66Profit before taxes1657200107500011198401161527485788.09Tax payable 497160322500335952348458145736.43Profit after taxes 1160040752500783888813068.8340051.66Add: Depreciation 166400166400166400166400166400Net cash flow 1326440918900950288979468.8506451.666
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