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Pipe Production Plant Feasibility Analysis

   

Added on  2020-03-16

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ECF6010 Business FinanceThe task: Prepare a capital budgeting reportNameInstitutionCase Study – Delaware Pipes 1
Pipe Production Plant Feasibility Analysis_1

ECF6010 Business FinanceTable of Contents1.Introduction.................................................................................................................................32.Analysis........................................................................................................................................32.1.Question One........................................................................................................................32.2.Question Two: the incremental cash flow table.................................................................52.3.Question Three: Decision Techniques...................................................................................72.3.2.Payback Period................................................................................................................82.4.Question 4: Sensitivity analysis of NPV to sales quantity...............................................102.5.Question 5: The project’s expected NPV, standard deviation, and coefficient of variation.........................................................................................................................................132.6.Question 6: The minimum annual increase.....................................................................142.7.Question 7: Does higher discounting rate make sense.....................................................152.8.Recommendation based on questions 1-7.........................................................................163.Conclusion..................................................................................................................................164.Recommendations......................................................................................................................165. References......................................................................................................................................17Case Study – Delaware Pipes 2
Pipe Production Plant Feasibility Analysis_2

ECF6010 Business Finance1.IntroductionBy using the information given for Mr. Walker about his company, this report isprepared to analyze the viability and to give some recommendation about a new productionline for two different sizes of pipes in Delaware Pipe. Delaware Pipe is a company with more than 29 years of background in the pipemarket to producing three used sizes of PVC pipe, 3 in, 6 in and 8 in. The company hasperformed very well in the last year only with these three production lines. However, twoother sizes are demanded by the customers, where until the present moment the companyhave purchased these goods from another company and have sold them. Company’s owner, Mr. Walker’s has provided relevant information about thecompany and the marketplace of the firm. In addition, the accountant of the Delaware Pipehas prepared a cost estimation for this production line, which resulted in an unfeasible projectfor the company. In the context of project evaluation, using NPV as one of the evaluation’s method, thisreport will show if the project is consistent with the firm goals. Furthermore, acomplementary revision in the accountant’s number will be presented.2.AnalysisThis section entails detailed analysis of the two options, i.e. producing the pipesinternally or buying them. The financial analysis techniques such as Payback Period (PBP),Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI) havebeen considered in the analysis based on the three scenarios i.e. Worst Scenario, Most Likely,and Best. 2.1.Question One2.1.1.ExhibitsExhibit 1: Probability Scenarios tableScenarioAnnual Sales (lbs)ProbabilityWorst1,350,0000.1Most Likely1,650,0000.6Best2,250,0000.3Case Study – Delaware Pipes 3
Pipe Production Plant Feasibility Analysis_3

ECF6010 Business Finance2.1.2.Exhibit 2: Depreciation Rates for MACRS PropertyYearRate114.30%223.50%316.20%411.50%58.90%68.90%78.90%84.60%93.20%2.1.3.Annual Cost of internal production 10-in and 12-in (Accountant estimation)1Raw material$544,5002Distribution cost$33,0003Direct labour$40,0004Indirect labour$8,0005On costs$11,5206Utilities$8,0007Repairs and Maintenance$7,0008Space$6,6009General factory$18,00010Depreciation$125,00011Lost interest$120,000TOTAL$921,620Net present value (NPV) is a financial tool used to determine whether or not a given project proposal is feasible for investment. A project is feasible if it yields a positive NPV. It is calculated by deducting the initial cash outlay from the discounted cash inflow. Therefore when calculating the Net Present Value the flowing items should be included;a)The projected cash flow (s).b)The Initial cash outlay: This is the original cost to be incurred if the proposed project is chosen; c)And, the discount rate based on the company’s cost of capital. Case Study – Delaware Pipes 4
Pipe Production Plant Feasibility Analysis_4

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