Finance Assignment: Daedulus Wings and Bitforth Co. Analysis

This report provides a detailed financial analysis of two scenarios. The first part assesses whether Daedulus Wings should refund and replace an existing bond issue with a new debt issue, considering factors like interest rates, call provisions, and tax rates. It calculates the savings and net present v...Read More

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

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Table of Contents
1. Comparing and calculating whether old issue be refunded and replaced with a debt issue:. 2
2. Detecting the investment viability of two projects by using the investment appraisal
techniques:..................................................................................................................................3
3.a Showing signs for Fields Machinery purchase the new machine:.......................................4
3.b Identifying whether purchase of new equipment needs to be conducted when old machine
has salvage value:.......................................................................................................................5
3.c Calculating the IRR and PI of the project:...........................................................................5
References:.................................................................................................................................7

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1. Comparing and calculating whether old issue be refunded and replaced with a debt
issue:
Particulars Value
Bond issue outstanding $ 50,000,000
Annual rate (Semi
annually)
12.00%
Annual rate (Semi
annually)
7.50%
Old interest annually $ 6,000,000
Net interest annually $ 3,750,000
Savings on interest annually $ 2,250,000
After tax savings $ 1,462,500
Present value of savings $ 9,960,889
Particulars Value
Bond issue outstanding $ 50,000,000
Call provision (above par) 8%
Tax rate 35%
After tax Payment of Call Premium $ 2,600,000
Particulars Value
Underwriting and financial expense $ 1,000,000
Maturity 15

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Tax rate 35%
Amortization cost $ 66,666.67
Tax on amortization cost $ 23,333.33
PV of future tax savings $158,920.17
Net cost of underwriting and financial expense $ 841,079.83
Particulars Value
Total cash outflows $ 3,441,080
Total cash inflows $ 9,960,889
Net Present Value $ 6,519,809
Hence, Daedulus Wings could utilise the new debt, as it will save about $ 6,519,809
in interest payment during the 15-year time.
2. Detecting the investment viability of two projects by using the investment appraisal
techniques:
Year Project A Cashflow Project B Cashflow
0 $ (350,000.00) $ (50,000.00)
1 $ 45,000.00 $ 24,000.00
2 $ 65,000.00 $ 22,000.00
3 $ 65,000.00 $ 19,500.00
4 $ 440,000.00 $ 14,600.00
Payback period 3.4 years 2.2 years
NPV $ 32,589.76 $ 8,673.89

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IRR 18% 24%
Profitability
Index
0.08 0.15
a. Payback period The Project B needs to be selected, as its value is lower than it peer
b. NPV From the NPV calculation the Project A needs to be selected by the
company, as it higher in value in comparisons to its peers (Baum
& Crosby, 2014).
c. IRR From the perspective of the IRR calculating the Project B needs to
be selected, as it has the highest return generating capability.
d. Profitability Index From the evaluation of profitability index the project B should be
taken into consideration, as its value is relevantly higher than
Project A.
e. Choice of Project From the evaluation of the above investment appraisal techniques
it could be identified that Project B should be taken into
consideration by Bitforth Co. The investment appraisal techniques
such as payback period, IRR and profitability index relevantly
depicts financial viability of Project B in comparison to Project A
(Li & Trutnevyte, 2017).
3.a Showing signs for Fields Machinery purchase the new machine:
New Machine Value
Operating expense (Cost savings) $ 17,500
Depreciation $ 6,750

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Operating income $ 10,750
Tax @30% $ 3,225
Income $ 7,525
Cash flow $ 14,275
Cash flow from the new machine is relevantly at the level of $14,275, while the old
machine is not providing any benefits to the organisation. Hence, switching to the new
machine is much more viable for the organisation.
3.b Identifying whether purchase of new equipment needs to be conducted when old
machine has salvage value:
Particulars Value
New Equipment Cost $ 72,000
Cost savings $ 17,500
Depreciation $ 6,750
Old machine salvage value $ 9,000
Return of the project 17.06%
Inclusion of salvage value presented by the old machine relevantly increase the return
of the project to 17.06%, which is a positive attribute for the organisation. Hence, selecting
the new machine is much more profitable process for the organisation.
3.c Calculating the IRR and PI of the project:
Time Cash Flow Dis-rate Dis-cash flow

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Year 1 $ 14,275 0.87 $ 12,413.04
Year 2 $ 14,275 0.76 $ 10,793.95
Year 3 $ 14,275 0.66 $ 9,386.04
Year 4 $ 14,275 0.57 $ 8,161.78
Year 5 $ 14,275 0.50 $ 7,097.20
Year 6 $ 14,275 0.43 $ 6,171.48
Year 7 $ 14,275 0.38 $ 5,366.50
Year 8 $ 14,275 0.33 $ 4,666.52
Year 9 $ 14,275 0.28 $ 4,057.85
Year 10 $ 14,275 0.25 $ 3,528.56
Present value of cash flow $ 71,642.92
Particulars Value
Present value of cash flow $ 71,642.92
New Equipment Cost $ 72,000.00
Profitability Index 1.00
Particulars Value
New Equipment
Cost
$ 72,000
Cost savings $ 17,500
Depreciation $ 6,750
IRR of the project 14.93%

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References:
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Li, F. G., & 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.