Financial Analysis Report: Dell's Laptop Manufacturing Plant Project

This report presents a comprehensive financial analysis of Dell's proposed laptop manufacturing plant, evaluating its feasibility using capital budgeting techniques. The analysis includes calculations of depreciation, cash flows, Net Present Value (NPV), Internal Rate of Return (IRR), and payback period. The report assesses the project's viability under different scenarios, including the impact of debt financing and interest rates. It also examines the company's policy of using a uniform cost of capital across all projects, highlighting its potential shortcomings. Furthermore, the report considers the implications of a new requirement that project inflows should service debt repayments. The findings indicate that the project is financially viable, provided the interest rate on borrowing does not exceed a certain threshold. The report concludes with recommendations for the company, emphasizing the need for a risk-adjusted cost of capital and flexibility in project selection.

MANAGERIAL FINANCE
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1

Executive Summary
The primary aim of this report is to present an analysis of the proposed laptop manufacturing
plant which Dell is intending to build on the existing land. Based on the information provided,
the capital budgeting tools and techniques have been deployed which clearly highlight that the
project is feasible. Further, this project is also successful in meeting the additional requirement
provided the interest rates do not exceed 22.62% p.a. However, going forward the company
needs to be ensure that the cost of capital of each internal project is reflective of the intrinsic risk
involved. Also, the company should rethink the additional requirement introduced and thereby
should be flexible regarding the same.
Introduction
The objective of the given report is to analyse a new laptop manufacturing facility that Dell is
planning to set up. In this regards, the requisite techniques of capital budgeting have been
deployed in order to comment on the feasibility of the project. Further, the given project has also
been analysed in the wake of the company policy whereby the project inflows should serve the
debt repayments or else the project would not be funded. Finally, discussion regarding this
additional requirement is carried out along with decision of the company to use the same cost of
capital for all internal projects irrespective of their respective risk.
Analysis
The requisite analysis of the proposed project is carried out below in the wake of the information
provided.
Question 1
The requisite queries with regards to the proposed project are answered as shown below.
PART A
The annual depreciation for the project over the useful life of ten years has been computed
below.

Explanation:
 Opening depreciable value (Year 1) = Initial investment – Residual value = 500 million –
150 million = $ 150 million
 Opening depreciable value (Year n) = Closing depreciable value (Year n-1)
 Depreciation expense = Opening depreciable value * 10%
 Closing depreciable value = Opening depreciable value – Depreciation
 Depreciation in last year (i.e. year 10) is computed considering the remaining depreciable
value so that all the requisite depreciation is charged.
PART B
The yearly cash flows associated with the plant from year 1 to year 9 are indicated below.

PART C
The following are the cash flows in year 0.
Initial investment = $ 500 million
Investment on inventory = $ 100 million
Hence, total cash outflow in year 0 = 500 + 100 = $ 600 million
PART D
The following are the cash flows in Year 10.
Incremental cash flows (exhibit 1) = $ 581.31 million
If it is assumed that the sale of the land would not be carried out at the end of project, hence cash
inflows = $581.31 million - $ 100 million = $ 481.31 million
If it is assumed that sale of land would be carried at the end of the project, hence cash inflows =
$ 581.31 million + $250 million = $ 831.31 million
PART E
The NPV of the project has been computed as shown in Exhibit 1.
The NPV comes out as $277.16 million. Considering that NPV is greater than zero, hence it
implies that the given project is economically feasible and thereby would create value for the
shareholders (Lasher, 2017).
PART F
The IRR of the project has been estimated using the IRR function and has come out as 25.94%.
Since the IRR is greater than the cost of capital (16%), hence the given project is economically
feasible and value accretive for the shareholders (Damodaran, 2015).
The payback period for the project has been computed as 3.79 years which implies that it would
take 3.79 years for the initial investment to be recovered which is not much considering the
useful life of 10 years.

PART G
Based on the learning in the course, the given approach seems flawed. This is because the
required cost of capital should be reflective of the underlying risk. For a risky project, the funds
raised would be at a higher cost and the same needs to be reflected in the cost of capital. If the
differing risks associated with projects is not captured in the respective cost of capital, then there
would underfunding to lower risk projects and overfunding to high risk projects assuming similar
cashflows (Petty et. al, 2016).
Question 2
PART A
Based on the given information, it is known that the initial outlay of $ 600 million would be
entirely funded through debt while it would need to be paid through 10 equal annual
installments. The maximum interest rate that the project can bear so that annual installment
payment is retrieved from the project ought to be determined. This interest rate is 22.62% p.a.
Hence, it can be concluded that even by the new criterion, the project would be feasible as long
as the interest rate of borrowing is lower than 22.62% p.a.
PART B
The obvious advantage of the new requirement is that it does not put any constraint on the
existing projects of the company since the debt for the new project is not to be serviced by the
other projects. Also, this would result in higher prudence on the part of the management with
regards to capital budgeting decisions and allocation of capital. The obvious disadvantage of this
approach is that the company may miss on some very lucrative and profitable projects as they are
not able to service the debt in one of the years. This is especially possible in the starting years or
during years where a one-time cash outflow may be involved which has adverse impact on the
net cash inflow (Brealey, Myers and Allen, 2014).
Conclusion and Recommendations
On the basis of the above discussion, it is apparent that the given manufacturing plant for laptops
is financially feasible. This is indicated by the positive NPV and also the IRR value which is
higher than the present cost of capital. Further, even when the new requirement of the project
funding debt repayments is introduced, then also the current project is feasible as long as the

interest rate on the loan is not greater than 22.62 % p.a. However, the policy of the company to
use the same cost of capital for projects with different risks is clearly incorrect and needs to be
altered. Besides, the new requirement in terms of project selection also may hurt the company in
long run as lucrative projects may not be funded. As a result, some flexibility is advisable in this
regards.

References
Brealey, R.A., Myers, S.C. and Allen, F. (2014) Principles of corporate finance. 2nd ed. New
York: McGraw-Hill Inc, pp. 164
Damodaran, A. (2015) Applied corporate finance: A user’s manual. 3rd ed. New York: Wiley,
John & Sons, pp.182
Lasher, W. R., (2017) Practical Financial Management. 5th ed. London: South- Western
College Publisher, pp. 189
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., and Nguyen, H. (2016)
Financial Management, Principles and Applications. 6th ed. NSW: Pearson Education, French
Forest Australia, pp. 131

APPENDIX
EXHIBIT 1