Apix Coffee Packaging: Investment Appraisal, NPV, and Risk Mitigation

This presentation provides a financial analysis of Apix's proposed diversification into the coffee packaging business. It assesses the project's feasibility by determining after-tax cash flows, computing Net Present Value (NPV) and Internal Rate of Return (IRR), and offering a tendering recommendation. The analysis reveals a negative NPV of -$1 million and an IRR of 9.08%, leading to the initial conclusion that the project should not be accepted due to the negative NPV and an IRR lower than the project's cost of capital (10%). The presentation further explores potential useful information such as equipment salvage value, the difference between book value and actual salvage value, and the impact of inflation on sales and expenses. It also discusses capital budgeting techniques, risk methodologies including scenario analysis, sensitivity analysis, and real options, highlighting their importance in decision-making, project ranking, and risk assessment.

FINANCE

Introduction
Apix considering diversification in business through
coffee packaging business
Decision to be taken if this is feasible or not
Steps Involved
 Determination of project cash flows after tax
 NPV & IRR computation
 Tendering recommendation

Project Estimated Cash Flow

Capital Budgeting Analysis

Issues regarding Information Availability
Summary of current analysis
 NPV = -$ 1 million
 IRR = 9.08%
Project would not be accepted
 NPV is negative
 IRR is lower than the project cost of capital (10%)
Even though decision can be made but the same is based
on assumptions and hence more information would be
desirable

Potential Useful Information
Equipment Salvage Value
Difference between book value and actual salvage
value in the terminal year
Risk Analysis related to capital budgeting
Inflation and the impact of the same on the project
(Sales and Expenses)

Techniques of Capital Budgeting
Determinant for decision making
 NPV
 IRR
Other uses of these determinants
 Choosing between mutually exclusive projects
 Ranking of projects with regards to financial feasibility
 Risk Analysis to determine the extend of risk
 Project financial feasibility
 Requisite information required is cost of capital and the
incremental post tax cash flows over project useful life

Risk Methodologies
Three major tools available for risk assessment
 Scenario Analysis – It considers the project feasibility first in different
scenarios such as optimistic, pessimistic before determining the project
feasibility by computing a weighted average NPV.
 Sensitivity Analysis – It helps in outlining the factors which can cause
maximum change in NPV and thereby these factors can be carefully
monitored.
 Real Options – This provide flexibility with regards to making decisions
regarding project closure and postponing even after initiation of project .
These are usually inserted in long term projects with high capital investment
and initial gestation period