Managerial Finance: Dell Inc. Plant Project Evaluation Report - ACC511

Verified

Added on  2022/11/23

|14
|1925
|492
Report
AI Summary
This report evaluates a proposed project for Dell Inc., specifically the establishment of a new laptop manufacturing plant. The analysis employs capital budgeting techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), and payback period, to assess the project's financial viability. The report calculates yearly depreciation, cash flows, and terminal values to determine the project's profitability. The NPV is found to be positive, the IRR exceeds the cost of capital, and the payback period is within the economic life of the project, suggesting that the project is acceptable. The report also emphasizes the importance of using risk-adjusted discount rates, rather than a uniform rate, for different projects. The report also addresses the financial aspects of securing a bank loan and the potential pros and cons associated with it. The conclusion recommends that Dell Inc. proceed with the project, while also considering the specific risks associated with the project when setting the discount rate.
tabler-icon-diamond-filled.svg

Contribute Materials

Your contribution can guide someone’s learning journey. Share your documents today.
Document Page
Running head: MANAGERIAL FINANCE
Managerial Finance
Name of the Student:
Name of the University:
Author’s Note:
Course ID:
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
1MANAGERIAL FINANCE
Executive Summary:
The report is prepared with the intent for analysis of a particular project, which is estimated to be
initiated by Dell Inc. As a part of the project, the organisation is intending to set up a new plant
in order to manufacture laptops. After taking into consideration all the above-discussed aspects,
it could be stated that the project is acceptable for Dell Inc, since NPV, IRR and payback period
meet their respective desired criteria. However, it is to be noted that the organisation need not
use the same discount rate for all capital projects and it needs to adjust the same depending on
particular project risks.
Document Page
2MANAGERIAL FINANCE
Table of Contents
Introduction:....................................................................................................................................3
Answer to Question 1:.....................................................................................................................3
Answer to Question 2:.....................................................................................................................8
Conclusion and recommendations:..................................................................................................9
References:....................................................................................................................................10
Appendices:...................................................................................................................................11
Document Page
3MANAGERIAL FINANCE
Introduction:
The report is prepared with the intent for analysis of a particular project, which is
estimated to be initiated by Dell Inc. As a part of the project, the organisation is intending to set
up a new plant in order to manufacture laptops. The paper would emphasise on evaluating the
viability of the concerned project by a number of capital budgeting approaches that constitute of
internal rate of return (IRR), net present value (NPV) and discounted payback period. After
obtaining and analysing the outcomes of the project, recommendations would be provided to the
concerned organisation regarding the feasibility of the project.
Answer to Question 1:
a) Yearly depreciation expense:
(b) Yearly cash flows associated with the plant from Year 1 to Year 9:
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
4MANAGERIAL FINANCE
(c) Cash flows in Year 0:
(d) Terminal or year-10 cash flows:
Document Page
5MANAGERIAL FINANCE
(e) Net present value (NPV) of the project:
NPV could be defined as the difference between the existing future cash values and the
investment made initially in order to undertake the project. The existing value of the estimated
cash flows is computed by discounting them at the required rate of return (Daunfeldt and
Hartwig 2014). When the value of NPV is positive, it denotes higher return and when the value
is negative, the return would lower than zero. When it comes to project comparison and
undertaking decision regarding the project selection, NPV is deemed to the suitable approach in
Document Page
6MANAGERIAL FINANCE
order to evaluate the profit margin of an investment in the project or a new project of the
organisation (Andor, Mohanty and Toth 2015).
There are various benefits associated with the NPV technique. Firstly, the consideration
of time value of money is significant for calculating the net cash flows. Secondly, this technique
takes into account inherent risk and cost of capital at the time of making future estimations (De
Andrés, De Fuente and San Martín 2015). The cash flow projections for 10 years is
comparatively lower in contrast the cash flows for the upcoming year. After evaluating the NPV
computation, it could be said that the manufacturing plant of Dell Inc has positive NPV
amounting $258,689,223. This clearly implies the fact that the project is expected to yield
considerable benefits and the initial outlay would be recovered completely well ahead of time.
Therefore, by undertaking the project, the wealth of the shareholders of Dell Inc could be
maximised. As a result, the project needs to be accepted by taking into consideration only the
value of NPV.
(f) Internal rate of return and payback period of the project:
Internal rate of return (IRR) could be described as the rate, which is utilised for analysing
the profit margin of any investment. This makes the discount rate of the cash flows from the
specific project identical to zero (De Souza and Lunkes 2016). In order to analyse any project
based on IRR, the value of IRR needs to be higher in comparison with the cost of capital. By
analysing the IRR for this particular project, the IRR is computed as 26%, which is higher than
the cost of capital of 16%. This denotes the viability of the project based on the evaluation of
IRR (Gitman, Juchau and Flanagan 2015).
tabler-icon-diamond-filled.svg

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
7MANAGERIAL FINANCE
Payback period, on the other hand, signifies the time that a project undertakes in order to
recover the total initial outlay made in the project. More precisely, this technique denotes the
average time that a project undertakes for arriving at the break-even point (Lusztig and Schwab
2014). The feasibility of any project has direct relationship with the payback period. In case of
shorter payback period, the attractiveness of project investment is increased, since it undertakes
lower time for recovering the amount of initial outlay. It has been found that the payback period
of the project is computed as 3.66 years, while the discounted payback period is computed as
5.88 years. Therefore, it could be said that the concerned project would be able to recover the
initial outlay within the economic life of the project (Nurullah and Kengatharan 2015).
Based on the above-discussed aspects, it could be said that the project is deemed to be
feasible, since the NPV of the project is found to be positive, the IRR of the project is higher
compared to the cost of capital and the payback period is lower than the economic life of the
project.
(g) Effectiveness of the approach:
At the time of evaluating any project for investment purpose, the project cash flows are
discounted to the current value in order to ensure the capture of the true value of the project.
From the general perspective, the application of discount rate is dependent on the market rate.
However, based on the circumstances related to the project or investment, it is necessary to use
the risk adjusted rate of return. This aids in disclosing the relationship between risk and return
(Rossi 2014). From the practical perspective, an investor is exposed to additional risk and it
would be provided with increased return, since higher losses could take place. This is specified
under the risk adjusted rate of discount, since the adjustment would result in changes to the
discount rate depending on the risk.
Document Page
8MANAGERIAL FINANCE
In addition, when the estimated return on investment is high, the risk is higher for
investment as well. The most inherent adjustment to risk is made owing to the uncertainty of
timing, cash flow duration and dollar values. Besides, there is presence of uncertainty for the
long-term projects in relation to the market scenario, inflation level and profit level on
investment in future. It is necessary to adjust the risks for the risk-adjusted projects depending on
the liquidity of the organisation and the default risk from the external parties. Therefore, the
entity is needed to adjust the rate of discount in order to represent the investment having the
potential of tarnishing the brand image of the organisation, which might result in regulatory
issues or lawsuits. As a result, the approach of the organisation to use the same rate of discount
for all projects is not suitable and therefore, it is necessary to make adjustments depending on the
particular project risks (Titman 2014).
Answer to Question 2:
Part a:
The overall amount needed to be raised via bank loan is $600 million. This needs
repayment through 10 equal instalments and hence the payment for each instalment would be
$60 million ($600 million/10) coupled with interest. In order to fulfil the financial discipline, it is
necessary to consider the lowest cash flow, which is in year 8 ($149,994,428). Therefore, after
the principal payment of $60,000,000, it would have $89,994,428 in order to cover finance costs.
This amount would align the interest rate computed as 15%.
Part b:
Pros of the new system Cons of the new system
Document Page
9MANAGERIAL FINANCE
The interest payment and principal amount
could be fulfilled appropriately with the
available cash flows.
Cash only protects the business and using it for
taking loan decision is not appropriate (Wnuk-
Pel 2014).
The organisation would not fall short at any
stage to make payment towards the loan over
the useful project life.
Owing to the changes in the market or any
unfavourable situation, there might be decline
in cash flow or sales. Under such situation, the
organisation might face issues in settling its
debt.
Conclusion and recommendations:
After taking into consideration all the above-discussed aspects, it could be stated that the
project is acceptable for Dell Inc, since NPV, IRR and payback period meet their respective
desired criteria. However, it is to be noted that the organisation need not use the same discount
rate for all capital projects and it needs to adjust the same depending on particular project risks.
tabler-icon-diamond-filled.svg

Secure Best Marks with AI Grader

Need help grading? Try our AI Grader for instant feedback on your assignments.
Document Page
10MANAGERIAL FINANCE
References:
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Daunfeldt, S.O. and Hartwig, F., 2014. What determines the use of capital budgeting methods?:
Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4), pp.101-112.
De Andrés, P., De Fuente, G. and San Martín, P., 2015. Capital budgeting practices in
Spain. BRQ Business Research Quarterly, 18(1), pp.37-56.
De Souza, P. and Lunkes, R.J., 2016. Capital budgeting practices by large Brazilian
companies. Contaduría y Administración, 61(3), pp.514-534.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Lusztig, P. and Schwab, B., 2014. Managerial finance in a Canadian setting. Butterworth-
Heinemann.
Nurullah, M. and Kengatharan, L., 2015. Capital budgeting practices: evidence from Sri
Lanka. Journal of Advances in Management Research, 12(1), pp.55-82.
Rossi, M., 2014. Capital budgeting in Europe: confronting theory with practice. International
Journal of Managerial and Financial Accounting, 6(4), pp.341-356.
Titman, S., 2014. Valuation. Pearson Higher Ed.
Wnuk-Pel, T., 2014. The practice and factors determining the selection of capital budgeting
methods–evidence from the field. Procedia-Social and Behavioral Sciences, 156, pp.612-616.
Document Page
11MANAGERIAL FINANCE
Document Page
12MANAGERIAL FINANCE
Appendices:
Appendix A: Financial spreadsheet calculations
tabler-icon-diamond-filled.svg

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
Document Page
13MANAGERIAL FINANCE
chevron_up_icon
1 out of 14
circle_padding
hide_on_mobile
zoom_out_icon
logo.png

Your All-in-One AI-Powered Toolkit for Academic Success.

Available 24*7 on WhatsApp / Email

[object Object]