EFB210 Finance 1 (Sem 3, 2019): Capital Budgeting Report and Analysis

This report presents a capital budgeting analysis for a company considering transporting coal via either train or truck. The methodology employed involves calculating and comparing cash flows for each transportation alternative over an eight-year period, including initial outlays, fuel costs, maintenance, salaries, and depreciation. The analysis reveals detailed capital budgets for both road (truck) and rail (train) transportation options, incorporating factors like depreciation and tax implications. The financial analysis recommends the use of train transportation over trucks based on the capital budgeting calculations, which show a lower total cash outflow for the train option. The report concludes with a summary highlighting the use of capital budgeting in making informed investment decisions for the company.

Running Head: BUSINESS FINANCE
0
Business Finance
Capital budgeting report and analysis
(Student Details: )
1/23/2020

BUSINESS FINANACE
1
Contents
Introduction................................................................................................................................2
Capital Budgeting Methodology................................................................................................2
Limitations.................................................................................................................................5
Recommendations......................................................................................................................6
Summary....................................................................................................................................6
References..................................................................................................................................7

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Introduction
This report is focused on producing financial analysis of the company which is
planning to use one of the two options include train and truck for transporting coal from their
coal mine. Here, the company can transport the coal either by rail or by road (truck). In this
way, based on the given information, this report will provide a detailed financial analysis of
both transportation options so that one option can be recommended.
Capital Budgeting Methodology
For the financial analysis, capital budgeting methodology has been used. In this
context, capital budgeting is usually used to create measurability as well as accountability.
Besides, whenever a business seeks to invest its resources in some projects while
understanding the risks and returns involved, then this methodology is employed. On the
other hand, if the company does not consider risks and returns then it would show huge
irresponsibility from the business owners and shareholders (Investopedia, 2020).
The employed methodology has calculated cash flows of each transportation
alternatives so that the best option can be recommended (Anum, 2018). The capital budgeting
analysis is justified in this case because it helps for planning such investment projects of any
firm in the long-term. While calculating the capital budget, all possible factors have been
considered in a way that the company can efficiently evaluate the profitability of the likely
projects (Ehrhardt & Brigham, 2016). In addition, with the help of capital budgeting capital
investments in both the projects include trains and trucks have been calculated for the long-
run. Thus, by considering the importance of capital budgeting for businesses, the following
capital budgets have been evaluated as follows:
Capital Budget for transportation by road (truck)
calculations of the capital budget
Years 0 1 2 3 4 5 6 7 8
Outlay;
Prime
Mover (per
truck)
13,500,0
00
Outlay;
Powered

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Dolly + 4
Haulage
Trailers
(per truck)
13,500,0
00
Working
capital 2,000,00
0
(2,000,0
00)
fuel cost 6,531,8
40
6,531,84
0 6,531,840 6,531,8
40 6,531,840 6,531,840 6,531,
840
6,531,8
40
Annual
Maintenan
ce (per
truck)
900,000 900,000 900,000 900,000 900,000 900,000 900,00
0 900,000
Additional
Maintenan
ce Year 4
(per truck)
4,500,0
00
Total
Annual
Haulage all
Trucks
7,776,0
00
7,776,00
0 7,776,000 7,776,0
00 7,776,000 7,776,000 7,776,
000
7,776,0
00
Driver
Salary 6,150,0
00
6,150,00
0 6,150,000 6,150,0
00 6,150,000 6,150,000 6,150,
000
6,150,0
00
Total
outflow (29,000,
000)
(21,357
,840)
(21,357,
840)
(21,357,84
0)
(25,857,
840)
(21,357,8
40)
(21,357,84
0)
(21,35
7,840)
(19,357,
840)
Less:
Depreciati
on
3,375,0
00
3,375,00
0 3,375,000 3,375,0
00 3,375,000 3,375,000 3,375,
000
3,375,0
00
Earnings
after
depreciatio
n
(29,000,
000)
(24,732
,840)
(24,732,
840)
(24,732,84
0)
(29,232,
840)
(24,732,8
40)
(24,732,84
0)
(24,73
2,840)
(22,732,
840)
Less: Tax (7,419,
852)
(7,419,8
52)
(7,419,852
)
(8,769,8
52)
(7,419,85
2)
(7,419,852
)
(7,419,
852)
(6,819,8
52)
Earnings
after tax (17,312
,988)
(17,312,
988)
(17,312,98
8)
(20,462,
988)
(17,312,9
88)
(17,312,98
8)
(17,31
2,988)
(15,912,
988)

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Add back:
depreciatio
n
3,375,0
00
3,375,00
0 3,375,000 3,375,0
00 3,375,000 3,375,000 3,375,
000
3,375,0
00
Cash
outflow (13,937
,988)
(13,937,
988)
(13,937,98
8)
(17,087,
988)
(13,937,9
88)
(13,937,98
8)
(13,93
7,988)
(12,537,
988)
Total cash
outflow (113,25
3,904)
Capital Budget for transportation by rail (train)
calculations of the capital budget
Years 0 1 2 3 4 5 6 7 8
Outlay;
Locomotive
(per
locomotive)
6,000,0
00
Outlay;
Carriages (per
carriage)
10,000,
000
Working
capital 1,000,0
00
(1,000,0
00)
fuel cost 1,612,80
0
1,612,
800
1,612,8
00
1,612,8
00
1,612,8
00
1,612,
800
1,612,8
00
1,612,8
00
Annual
Maintenance
(per train)
1,000,00
0
1,000,
000
1,000,0
00
1,000,0
00
1,000,0
00
1,000,
000
1,000,0
00
1,000,0
00
Additional
Maintenance
Year 4 (per
train)
Total Annual
Haulage all 7,200,00 7,200, 7,200,0 7,200,0 7,200,0 7,200, 7,200,0 7,200,0

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Trains 0 000 00 00 00 000 00 00
Driver Salary 1,800,00
0
1,800,
000
1,800,0
00
1,800,0
00
1,800,0
00
1,800,
000
1,800,0
00
1,800,0
00
Total outflow (17,000
,000)
(11,612,
800)
(11,61
2,800)
(11,61
2,800)
(11,612
,800)
(11,612
,800)
(11,6
12,80
0)
(11,612
,800)
(10,612,
800)
Less:
Depreciation 2,000,00
0
2,000,
000
2,000,0
00
2,000,0
00
2,000,0
00
2,000,
000
2,000,0
00
2,000,0
00
Earnings after
depreciation (17,000
,000)
(13,612,
800)
(13,61
2,800)
(13,61
2,800)
(13,612
,800)
(13,612
,800)
(13,6
12,80
0)
(13,612
,800)
(12,612,
800)
Less: Tax (4,083,8
40)
(4,083
,840)
(4,083,
840)
(4,083,
840)
(4,083,
840)
(4,08
3,840
)
(4,083,
840)
(3,783,8
40)
Earnings after
tax (9,528,9
60)
(9,528
,960)
(9,528,
960)
(9,528,
960)
(9,528,
960)
(9,52
8,960
)
(9,528,
960)
(8,828,9
60)
Add back:
depreciation 2,000,00
0
2,000,
000
2,000,0
00
2,000,0
00
2,000,0
00
2,000,
000
2,000,0
00
2,000,0
00
Cash outflow (7,528,9
60)
(7,528
,960)
(7,528,
960)
(7,528,
960)
(7,528,
960)
(7,52
8,960
)
(7,528,
960)
(6,828,9
60)
Total cash
outflow (59,531,
680)

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Limitations
There are some limitations of the methodology used for the financial analysis chosen
in this paper. In the context of capital budgeting, some key limitations are as follows:
 Time horizon
 Cash flow (Investopedia, 2020).
 Discount rates
 Time value (Clayman, Fridson, & Troughton, 2012).
Recommendations
Based on the above capital budgeting calculations, it has been found that the
feasibility of transporting coal through trains will be higher than the feasibility of transporting
coal through trucks. It is because cash flows calculated by capital budgeting has determined
the value of a potential investment project in terms of train and truck transportation. Hence,
based on (Clayman, Fridson, & Troughton, 2012), the cash flows are showing the total
required investment for the two projects which is less in the second case of coal
transportation by train through railways. Therefore, the detailed financial analysis is
recommending that the company should use the train transportation for coal transportation for
their coal mines.
Summary
In whole, this financial analysis through capital budgeting has helped the chosen
company to take a decision on the basis of capital budgeting so that profitable projects can be
selected for further investment. The given data has been used for generating the capital
budget for both cases include truck and train transportation for the coal so that the investor
companies got the information based on which they can make the right decision. In this way,
this capital budgeting analysis has found that the best suited project for the coal mine is the
railways while transporting coal with trains rather than via trucks through roadways.

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References
Anum, F. (2018). ANALYSIS FACTORS OF AFFECTING CAPITAL STRUCTURE
WITH FIRM SIZE AS MODERATING VARIABLE IN CONSUMER GOODS
COMPANIES LISTED ON BEI. International Journal of public budgeting,
accounting and finance, 1(2).
Clayman, M. R., Fridson, M. S., & Troughton, G. H. (2012). Corporate finance: a practical
approach (2nd ed., Vol. 42). New Jersey: John Wiley & Sons.
Ehrhardt, M., & Brigham, E. (2016). Corporate finance: A focused approach. UK: Cengage
Learning.
Investopedia. (2020). An Introduction to Capital Budgeting. Retrieved from Investopedia:
https://www.investopedia.com/articles/financial-theory/11/corporate-project-
valuation-methods.asp