University Finance Report: Fundamentals of Corporate Finance Analysis

This report delves into the fundamentals of corporate finance, focusing on the analysis of Net Present Value (NPV) and its value drivers, including volume growth rate, inflation, and direct material costs. It examines sensitivity analysis to assess the impact of these drivers on NPV calculations, providing insights into the financial viability of potential investments. The report then provides recommendations regarding an investment in a Zinser machine for Aurora Holdings, contrasting this investment with the option of paying dividends. The analysis considers the company's deteriorating financial performance and concludes that investing in the Zinser machine is the more prudent course of action, offering a higher potential for returns and financial stability compared to distributing dividends. The report references several academic sources to support its arguments and analysis.

Running head: FUNDAMENTALS OF CORPORATE FINANCE
Fundamentals of Corporate Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Question 2: Depicting the value drivers in NPV calculation, while stating sensitivity analysis
to examine its impact on the NPV..............................................................................................2
Question 3: Providing relevant recommendations about investing in Zinser machine, while
stating whether investment in Zinser is adequate or paying dividends and depict the
recommended course of action...................................................................................................4
Reference and Bibliography:......................................................................................................6

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Question 2: Depicting the value drivers in NPV calculation, while stating sensitivity
analysis to examine its impact on the NPV
The value drivers that can be identified as the main components of NPV calculation
are volume growth rate, inflation, discounting rate, price per unit. annual volume, and direct
material per unit. The identified drivers mainly indicate the overall cash inflow and outflow,
which is been conducted in the NPV calculation. Furthermore, the changes in volume growth
rate, and inflation directly altered the overall cash outflow and inflow of the NPV valuation.
The purpose of NPV methods is to identify whether relevant option is adequate for
connecting the relevant option and increasing profitability from the operation. Baum and
Crosby (2014) mentioned that companies mainly use investment appraisal techniques to
identify viability of the project, which could increase its overall firm value. The relevant
evaluation of the value drivers is depicted as follows.
Volume Growth rate:
The increment and volume growth rate as a relatively 2% throughout the tenure
process, which indicates the rising demand for the product that it will increase eventually in
future. The constant percent rate relatively increases the volume growth of 484,500 to
579,022 within 10 years of the evaluation process. In this context, Li and Trutnevyte (2017)
mentioned that with relevant evaluation of demand the estimated increment in production
needs to be conducted to maintain the level of competition in the market.
Inflation:
The second value driver that is identified from the analysis is the calculation of
inflation, which relatively helps in increasing the overall prices of the product. Inflation rate
mainly increased the overall selling price of the product, which helps in raising the level of

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revenue generated from the proposed project. The inflation rate mainly helps in depicting the
overall devaluation of currency, which will be conducted over the period of 10 years. This
relativity helps in identifying the actual revenues that needs to be earned by the project.
Direct Material per unit:
Changes in direct material price is also seen in the evaluation of NPV, where
increment in value of is derived from changes of inflation rate and the initial direct material
cost. The direct material cost for single expenditure which is conducted in the project for
completing the production process and delivering the required level of inventory for sale.
Changes in the value of the inventory is due to the changing prices of raw materials, which
might incur in future. Upton et al. (2015) argued that without the proper evaluation of
expenses project financial viability cannot be detected by the company.
The sensitivity analysis of both situation one and two is relatively conducted in the
calculation, which helps in deriving the relevant viability of the project. Sensitivity analysis
mainly helps in detecting the financial strength of the project, which is depicted to the
organization. The sensitivity analysis mainly provides two alternative inventory approaches,
which changes the overall cash inflow of the project. There are two reinvestment measures
which is used in the alternative scenarios that could help in protecting the actual NPV of the
project. According to Laird and Venables (2017), NPV valuation allows investors to identify
the actual income that will be generated from the cash inflows of the project.
There are two NPV evaluation that is derived from the project, which relevantly
allows the company to make adequate investment decision. The first NPV valuation of the
project is relatively at the levels of 8,129,803, which might increase the relevant returns from
investment. The alternative method that is used for the evaluation of the project mainly
provides an NPV of 7,719,969, which is relatively lower than the first alternative provided

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for the project. this relatively indicates that using FGI in investment could eventually help in
improving the NPV evaluation of the project. However, using the raw material only scenario
would directly reduce the NPV valuation, due to the high cost incurred from the alternative.
Question 3: Providing relevant recommendations about investing in Zinser machine,
while stating whether investment in Zinser is adequate or paying dividends and depict
the recommended course of action
The financial performance of Aurora Holdings has been deteriorating over the period,
which indicates the low financial performance of the organization. Therefore, the decision for
providing dividend would be drastic for the organization, as the company will expense more
cash. This would relatively reduce the cash flow of the organization and hamper its stability
over the time. The share price of the organization is relatively deteriorated over the period
from $30 to $12, which initiates that providing dividend motivate the investors and increase
in share value. However, this would reduce its valuation in the eyes of investors, as the
company will not be able to sustain its operations after the dividend. In this context, Almarri
and Blackwell (2014) mentioned that dividends are only provided by companies after
evaluating their financial position and cash condition. On the other hand, Locatelli, Invernizzi
and Mancini (2016) further contributed that without dividend payments companies are not
able to increase their share price, as investor are keen on identifying the actual returns that
will be provided from their investments.
Moreover, evaluation of Zinser machine is conducted, which helps in identifying the
overall returns that could be provided from the relevant investments. In addition, the financial
progress and cash inflows that will be provided from Zinser machine is evaluated with the
help of net present value calculation. This evaluation meaning indicate that Zinser machine
could provide higher returns from investment and generate positive cash flow for the

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company. This would relatively increase the overall financial progress and change the
downtrend of the organization. The NPV valuation is mainly detected to be at the levels of
8,129,803, which is relatively higher and could increase financial progress of the
organization. The calculation is relatively conducted on the overall profits that will be
incurred by the company from the project. Throsby (2016) argued that NPV valuation mainly
loses its overall friction if adequate discount rate is not used for the valuation process. This
might portray wrong financial condition of the project and hamper profitability of the
organization. However, the organization relatively use 10%, as the discount rate, which could
help in detecting financial viability of the project.
However, from the evaluation of both the options that is presented to the company,
whether to provide dividends or invest in Zinser machine, one of the option can be selected.
The selection of investment in Zinser machine is the most viable approach, which might
improve the level of returns that is provided by the company. Zinser machine is the most
viable approach that could allow the company to generate high level of returns over the
period of 10 years, which might let the investors to gather high level of dividends over the
period. On the other hand, providing dividend by the company would directly reduce its
financial capability of the organization to commence with the overall project. This might
hamper financial position of the organization and further reduce its share valuation. Kolawole
(2016) mentioned that with the use of investment appraisal techniques such as IRR, Payback
period, PI and NPV, companies able to identify financial viability of the project and detect its
ability to provide positive cash inflow.
Therefore, it could be stated that investments in Zinser Machine is the most viable
approach that could be used by Aurora Holdings for increasing its financial stability over the
period of 10 years. Hence, investing in the project would eventually allow Aurora Holdings

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to effectively increased its financial position, which in turn could reduce the negative decline
of its revenue and growth.
Reference and Bibliography:
Almarri, K., and Blackwell, P. 2014. Improving risk sharing and investment appraisal for
PPP procurement success in large green projects. Procedia-Social and Behavioral
Sciences, 119, 847-856.
Awojobi, O., and Jenkins, G. P. 2016. Managing the cost overrun risks of hydroelectric dams:
An application of reference class forecasting techniques. Renewable and Sustainable Energy
Reviews, 63, 19-32.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Crosby, N., and Henneberry, J. 2016. Financialisation, the valuation of investment property
and the urban built environment in the UK. Urban Studies, 53(7), 1424-1441.
Kolawole, O. A. 2016. Assessment of the Reliability of Techniques Employed in Feasibility
and Viability Appraisal. Assessment, 7(15).
Laird, J. J., and Venables, A. J. 2017. Transport investment and economic performance: A
framework for project appraisal. Transport Policy, 56, 1-11.
Li, F. G., and Trutnevyte, E. 2017. Investment appraisal of cost-optimal and near-optimal
pathways for the UK electricity sector transition to 2050. Applied energy, 189, 89-109.
Locatelli, G., Invernizzi, D. C., and Mancini, M. 2016. Investment and risk appraisal in
energy storage systems: A real options approach. Energy, 104, 114-131.
Throsby, D. 2016. Investment in urban heritage conservation in developing countries:
Concepts, methods and data. City, Culture and Society, 7(2), 81-86.

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Upton, J., Murphy, M., De Boer, I. J. M., Koerkamp, P. G., Berentsen, P. B. M., and Shalloo,
L. 2015. Investment appraisal of technology innovations on dairy farm electricity
consumption. Journal of dairy science, 98(2), 898-909.