Business Finance Project: Investment Appraisal for Pipe Production

This business finance project analyzes the potential investment in the production of 10-in and 12-in pipes. The assignment begins by identifying irrelevant items from an accountant's list to derive accurate cash flow projections. It then calculates the incremental cash flow for the most likely scenario, followed by an evaluation of the project using Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI), determining its acceptability based on a five-year cutoff period. Sensitivity analysis is performed for worst and best-case scenarios, and expected sales, standard deviation, and coefficient of variation are calculated. The project also evaluates the impact of a 20% sales increase and justifies the use of a high discount rate. Finally, a recommendation is provided regarding the production of 10-in and 12-in pipes based on the financial analysis and various scenarios.

Running head: BUSINESS FINANCE
Business Finance
Name of the Student:
Name of the University:
Authors Note:

1
BUSINESS FINANCE
Table of Contents
1. Mentioning the items that need to be omitted from the list provided by the accountant in
Exhibit 3:....................................................................................................................................2
2. Providing the incremental cash flow for most likely situation:.............................................3
3. Evaluating the project based in NPV, internal rate of return (IRR) and profitability index
(PI) of the project and detecting whether the project is acceptable if the cut-off period is five
years:..........................................................................................................................................6
4. Showing the sensitivity analysis of both worst and best case scenario provided in exhibit 1:
....................................................................................................................................................7
5. Calculating the expected sales, standard deviation and coefficient variance:......................13
6. Providing the relevant evaluation for the change in sales with minimum increment of 20%:
..................................................................................................................................................13
7. Stating the reason whether the use of high discount rate is viable approach if the inflation
rate is only 3%:.........................................................................................................................13
8. Depicting relevant recommendation for the production of 10-in and 12-in Pipe:...............14
Reference and Bibliography:....................................................................................................15

2
BUSINESS FINANCE
1. Mentioning the items that need to be omitted from the list provided by the accountant
in Exhibit 3:
The evaluation of the list provided by the finance department mainly indicates two
irrelevant accounts such as indirect labour and space, which can be omitted for deriving the
actual cash flow of the organisation. After analysing the case study it can be identified that
the company is providing relevant taxes and no rent for the space is needed. Furthermore, the
indirect expenses directly state the supervisor's salary, which is depicted in the case study that
the current supervisor will monitor the overall work. Hence, the expenses are irrelevant and
should be omitted from the evaluation. Therefore, the identified accounts could eventually
help in depicting the relevant cash flow, which could be used identifying viability of the
project (Awojobi & Jenkins, 2016).

3
BUSINESS FINANCE
2. Providing the incremental cash flow for most likely situation:
Particulars 0 1 2 3 4 5 6 7 8
Initial investment $ 1,000,000
Unit selling price 0.56 0.58 0.59 0.61 0.63 0.65 0.67 0.69
Annual sales 1,650,0
00
1,699,5
00
1,750,4
85
1,803,0
00
1,857,0
90
1,912,8
02
1,970,18
6
2,029,2
92
Revenue 924,
000
980,
272
1,039,9
70
1,103,3
04
1,170,4
96
1,241,7
79
1,317,40
3
1,397,6
33
Raw materials $544,500 $560,835 $577,660 $594,990 $612,840 $631,225 $650,161 $669,666
Distribution cost $33,000 33,
990
35,0
10
36,0
60
37,1
42
38,2
56
39,40
4
40,5
86
Direct labour $40,000 41,
200
42,4
36
43,7
09
45,0
20
46,3
71
47,76
2
49,1
95
On costs $11,520 11, 12,2 12,5 12,9 13,3 13,75 14,1

4
BUSINESS FINANCE
866 22 88 66 55 5 68
Utilities $8,000 8,
240
8,
487
8,7
42
9,0
04
9,2
74
9,55
2
9,8
39
Repairs and Maintenance $7,000 7,
210
7,
426
7,6
49
7,8
79
8,1
15
8,35
8
8,6
09
General factory $18,000 18,
540
19,0
96
19,6
69
20,2
59
20,8
67
21,49
3
22,1
38
Depreciation $
143,000
235,
000
162,0
00
115,0
00
89,0
00
89,0
00
89,00
0
46,0
00
Lost interest $120,000 123,
600
127,3
08
131,1
27
135,0
61
139,1
13
143,28
6
147,5
85
TOTAL $925,020 $1,040,481 $991,645 $969,534 $969,170 $995,576 $1,022,773 $1,007,786
salvage value $ 150,000
PBT (1,0
20)
(60,2
09)
48,3
25
133,7
70
201,3
25
246,2
03
294,63
0
539,8
47
Tax 14,4 40,1 60,3 73,8 88,38 161,9

5
BUSINESS FINANCE
- - 98 31 98 61 9 54
PAT (1,0
20)
(60,2
09)
33,8
28
93,6
39
140,9
28
172,3
42
206,24
1
377,8
93
Net Cash flow $
(1,000,000)
141,
980
174,
791
195,8
28
208,6
39
229,9
28
261,3
42
295,24
1
423,8
93

6
BUSINESS FINANCE
3. Evaluating the project based in NPV, internal rate of return (IRR) and profitability index (PI) of the project and detecting whether
the project is acceptable if the cut-off period is five years:
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Net Cash flow $
(1,000,000)
141,
980
174,
791
195,8
28
208,6
39
229,9
28
261,3
42
295,2
41
423,
893
Cumulative cash flow $
(1,000,000)
(858,0
20)
(683,2
29)
(487,4
01)
(278,7
62)
(48,8
35)
212,5
07
507,7
49
931,
641
NPV $202,701.90
IRR 14%
Payback period 5.2
Profitability index 1.20
From the overall evaluation it could be identified that payback period has come to 5.2 years, which does not comply with the 5 year
criteria of the company. This will mainly indicates that the project must be rejected in the basis of payback period.

7
BUSINESS FINANCE
4. Showing the sensitivity analysis of both worst and best case scenario provided in exhibit 1:
Worst Case Scenario
Particulars 0 1 2 3 4 5 6 7 8
Initial investment $ 1,000,000
Unit selling price 0.56 0.58 0.59 0.61 0.63 0.65 0.67 0.69
Annual sales 1,350,0
00
1,390,5
00
1,432,2
15
1,475,1
81
1,519,4
37
1,565,0
20
1,611,9
71
1,660,3
30
Revenue 756,
000
802,
040
850,8
85
902,7
04
957,6
78
1,016,0
01
1,077,8
75
1,143,5
18
Raw materials $445,500 $458,865 $472,631 $486,810 $501,414 $516,457 $531,950 $547,909
Distribution cost $33,000 33,
990
35,0
10
36,0
60
37,1
42
38,2
56
39,4
04
40,
586
Direct labour $40,000 41,
200
42,4
36
43,7
09
45,0
20
46,3
71
47,7
62
49,
195

8
BUSINESS FINANCE
On costs $11,520 11,
866
12,2
22
12,5
88
12,9
66
13,3
55
13,7
55
14,
168
Utilities $8,000 8,
240
8,
487
8,7
42
9,0
04
9,2
74
9,5
52
9,
839
Repairs and
Maintenance
$7,000 7,
210
7,
426
7,6
49
7,8
79
8,1
15
8,3
58
8,
609
General factory $18,000 18,
540
19,0
96
19,6
69
20,2
59
20,8
67
21,4
93
22,
138
Depreciation $
143,000
235,
000
162,0
00
115,0
00
89,0
00
89,0
00
89,0
00
46,
000
Lost interest $120,000 123,
600
127,3
08
131,1
27
135,0
61
139,1
13
143,2
86
147,
585
TOTAL $826,020 $938,511 $886,616 $861,354 $857,745 $880,807 $904,562 $886,028
salvage value $
150,000
PBT (70, (136,4 (35,7 41,3 99,9 135,1 173,3 407,

9
BUSINESS FINANCE
020) 70) 31) 49 33 93 14 489
Tax
- -
(10,7
19)
12,4
05
29,9
80
40,5
58
51,9
94
122,
247
PAT (70,
020)
(136,4
70)
(25,0
12)
28,9
44
69,9
53
94,6
35
121,3
20
285,
243
Net Cash flow $
(1,000,000)
72,
980
98,
530
136,9
88
143,9
44
158,9
53
183,6
35
210,3
20
331,
243
Cumulative cash flow $
(1,000,000)
(927,0
20)
(828,4
90)
(691,5
02)
(547,55
8)
(388,60
4)
(204,96
9)
5,3
50
336,
593
NPV ($186,178.69)
IRR 6%
Payback period
7.0
profitability index 0.
81

10
BUSINESS FINANCE
Best Case Scenario
Particulars 0 1 2 3 4 5 6 7 8
Initial investment $
1,000,000
Unit selling price 0.56 0.58 0.59 0.61 0.63 0.65 0.67 0.69
Annual sales 2,250,
000
2,317,
500
2,387,0
25
2,458,63
6
2,532,39
5
2,608,36
7
2,686,61
8
2,767,2
16
Revenue 1,260,
000
1,336,
734
1,418,1
41
1,504,50
6
1,596,13
0
1,693,33
5
1,796,45
9
1,905,8
63
Raw materials $742,500 $764,775 $787,718 $811,350 $835,690 $860,761 $886,584 $913,181
Distribution cost $33,000 33
,990
35,0
10
36,0
60
37,1
42
38,2
56
39,4
04
40,
586
Direct labour $40,000 41
,200
42,4
36
43,7
09
45,0
20
46,3
71
47,7
62
49,
195
On costs $11,520 11 12,2 12,5 12,9 13,3 13,7 14,

11
BUSINESS FINANCE
,866 22 88 66 55 55 168
Utilities $8,000 8
,240
8,
487
8,7
42
9,0
04
9,2
74
9,5
52
9,
839
Repairs and
Maintenance
$7,000 7
,210
7,
426
7,6
49
7,8
79
8,1
15
8,3
58
8,
609
General factory $18,000 18
,540
19,0
96
19,6
69
20,2
59
20,8
67
21,4
93
22,
138
Depreciation $
143,000
235
,000
162,0
00
115,00
0
89,0
00
89,0
00
89,0
00
46,
000
Lost interest $120,000 123
,600
127,3
08
131,12
7
135,06
1
139,11
3
143,28
6
147,
585
TOTAL $1,123,020 $1,244,421 $1,201,70
3
$1,185,89
4
$1,192,02
1
$1,225,11
2
$1,259,19
5
$1,251,30
1
salvage value $
150,000
PBT 136 92 216,4 318,61 404,10 468,22 537,26 804,