Corporate Finance Management: Investment Appraisal for FFBE Expansion

This report provides a comprehensive analysis of Fangio Family Business Enterprise's (FFBE) proposed expansion into stainless-steel tank production, including tanks for an Asian project, rainwater tanks, and balcony rails. It applies investment appraisal techniques such as NPV and IRR to assess the project's financial viability, revealing a negative NPV and an unfavorable IRR, suggesting the project is not currently financially sound. A sensitivity analysis for balcony rails is conducted to determine the price point for profitability. The report also considers external factors like inflation, competitive pressure, debt availability, interest rate fluctuations, and governmental regulations, which could significantly impact the project's success. Ultimately, the report advises against pursuing the project in its current form due to the potential for losses and highlights the need for further evaluation and adjustments to the business plan.

Running head: CORPORATE FINANCE MANAGEMENT
Corporate Finance Management
Name of the Student:
Name of the University:
Author’s Note

1
CORPORATE FINANCE MANAGEMENT
Executive Summary
The report effectively discussion regarding the business of Fangio Family Business Enterprise
(FFBE) which is engaged in the business of producing marine products. The report shows that
the business is planning to expand the operations for which the management will be diversifying
the operations of the business. The assessment shows application of investment appraisal
techniques for decision making process regarding the project. The assessment also discusses
other factors which can affect the new business line. The assessment would be reflecting
decision regarding whether to accept or reject the new proposal for the business.

2
CORPORATE FINANCE MANAGEMENT
Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Analysis for the Project...............................................................................................................3
Application of Investment Appraisal Techniques.......................................................................5
Sensitivity Analysis for Balcony Rails........................................................................................7
Other Factors which needs to be Considered..............................................................................8
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................11

3
CORPORATE FINANCE MANAGEMENT
Introduction
The main purpose of the assessment is to analyse the business of Fangio Family Business
Enterprise (FFBE) which is engaged in the business of providing marine products to the
customers. The assessment analyses whether the business can expand its operation or not by
diversifying the business line in which it is currently operating. In order to assess this, financial
analysis of the business and the proposed project of expansion is to be undertaken so that long
term viability of the project can be ensured1. The assessment would be showing new products
which are being considered by the business such as tanks for Asian project, Rainwater tanks and
Balcony Rails for which investment appraisal techniques are to be applied. The assessment
would also be showing sensitivity analysis for the same.
Discussion
Analysis for the Project
The new project would be enhancing the revenue generation of the business and also
further diversify the operations of the business. The business mainly operated in marine products
but in case the proposal is accepted than the business can move in the stainless-steel tank
production which can definitely enhance the revenue of the business. The new products which is
proposed as per the plan are tanks for Asian project, Rainwater tanks and Balcony Rails. The
analysis for the same can be conducted with the help of NPV and IRR for the project which is
computed and shown below in the table format:
1 Baum, Andrew E., and Neil Crosby. Property investment appraisal. John Wiley & Sons, 2014.

4
CORPORATE FINANCE MANAGEMENT
Figure 1: (Table showing costs and cash flow from the New Project)
Source: (Created by the Author)
The above table shows the different costs which can be estimated for the three types of
products which the management of the company is planning to manufacture in the business. The
period which is considered for the analysis is 10 years for which the sales units and sales revenue
are shown in the table above. The market conditions show that the market is quite favourable for
rainwater tanks and therefore a steady revenue can be anticipated from such a source. On the
other hand, tanks for Asian project can be quoted for a particular order from the company. The
tanks for Asian project is for the first two years and is expected to generate a revenue of $

5
CORPORATE FINANCE MANAGEMENT
450,000 for the two-year period. The sales revenue which is generated from sale of rainwater
tank is shown to have increased from the third years and the same is shown to be $ 500,000
which is mainly due to the fact that the total units for sales for the product has enhanced2.
Another major revenue generating product which is shown in the above table is balcony rails and
the same is shown to be generated more revenue in comparison to rainwater tank and tanks for
Asian projects. The total expenses which is related to the project is also shown to be significantly
high and the same is shown to be increasing in the initial three-year period after which the same
is considered to be constant. The main reason for the same is that the business considers that
inflation factor will not have much impact on the prices of materials and costs of the business3.
The management of the company intends to take a loan for the purpose of financing the
requirements of the project and the loan is to be repaid at the end of year 10. The cash flow
which is generated after the repayment of loan is shown to be negative which needs to be
considered for the decision-making process of the business.
Application of Investment Appraisal Techniques
In order to effective assess the project which is being considered by the management of
the company, appropriate investment appraisal techniques are to be applied. One of the
techniques which is used by the management of the company is NPV analysis which assess the
future viability of the project by computing the cash inflows which is anticipated from the
project. The projection of NPV, IRR and payback period for the project is shown in the table
which is presented below:
2 Harris, Elaine. Strategic project risk appraisal and management. Routledge, 2017.
3 Xu, Wei, Zhi Xiao, Xin Dang, Daoli Yang, and Xianglei Yang. "Financial ratio selection for business failure
prediction using soft set theory." Knowledge-Based Systems 63 (2014): 59-67.

6
CORPORATE FINANCE MANAGEMENT
Year Cash Flow
Working
capital
Total Cash
flows
Cum-cash
flows
Discounting
factor
Dis-cash
flow
0 ($430,000) ($20,000) ($450,000) ($450,000) 1.00
($450,000
)
1 $3,041 $0 $3,041 ($446,959) 0.87 $2,644
2 $78,388 $0 $78,388 ($368,571) 0.76 $59,272
3 $78,885 $0 $78,885 ($289,686) 0.66 $51,868
4 $99,349 $0 $99,349 ($190,337) 0.57 $56,803
5 $130,209 $0 $130,209 ($60,127) 0.50 $64,737
6 $138,840 $0 $138,840 $78,712 0.43 $60,024
7 $138,840 $0 $138,840 $217,552 0.38 $52,195
8 $138,840 $0 $138,840 $356,391 0.33 $45,387
9 $138,840 $0 $138,840 $495,231 0.28 $39,467
10 ($207,660) $20,000 ($187,660) $307,570 0.25 ($46,387)
NPV
($63,988.6
5)
IRR 12.04%
Payback
period 5.5 years
The above table shows that the initial working capital which would be required by the
management of the company is shown to be $ 450,000. The NPV of the project is shown to be
negative and the figure is shown to be $ 63,988.65. This suggest that the viability of the project
is a serious concern which the management of the company need to consider. In addition to this,
the table shows that it would take 5.5 years for completing the project4. The table which is
4 Pivorienė, Agnė. "Real options and discounted cash flow analysis to assess strategic investment
projects." Economics and Business 30, no. 1 (2017): 91-101.

7
CORPORATE FINANCE MANAGEMENT
presented above shows that the management would not be able to generate appropriate cash
inflows to cover the initial investment which is made by the management of the company. This is
mainly because of the high costs which the management anticipates it would have to incur for the
project.
The IRR of the project is an important indicator whether the project is viable or not and it
effectively helps in making comparisons between projects and effectively helps in decision
making process. The IRR is shown to be 12.04% which is lower than the required rate of return
and therefore the same is shown not to be favourable5. In an overall estimate, it can be said that
the project would not be generating profits in the long run as the NPV and IRR of the project is
shown to be unfavourable. Therefore, it can be said that the management of the company needs
to reject the project as it would not be viable and would be attracting losses in the long run.
Sensitivity Analysis for Balcony Rails
In order to further assess whether the balcony rails product line is appropriate for the
business in terms of generation of revenue6. The analysis is conducted to reveal the estimated
changes in revenue for the business with slight changes in prices and quantity which is offered to
the customers. The same is shown with the help of table presented below:
5 Mellichamp, Duncan A. "New discounted cash flow method: Estimating plant profitability at the conceptual design
level while compensating for business risk/uncertainty." Computers & Chemical Engineering 48 (2013): 251-263.
6 Iooss, Bertrand, and Paul Lemaître. "A review on global sensitivity analysis methods." In Uncertainty management
in simulation-optimization of complex systems, pp. 101-122. Springer, Boston, MA, 2015.

8
CORPORATE FINANCE MANAGEMENT
The above shows that the business would be above to generate appropriate revenue when
the prices is set above $ 200 per unit. Anything below this price would be generating losses for
the business and therefore the management needs to take appropriate decisions considering the
same.
Other Factors which needs to be Considered
The new project which FFBE is considering is shown to be profitable as per the analysis
of investment appraisal techniques but there are also some other considerations. There are other
factors which needs to be considered by the management of Fangio Family Business Enterprise
(FFBE) which can have an impact on the newly proposed project and the expansion plan of the
business are discussed in details below:
 Inflation: One of the major factor which can have significant impact on the viability of
the project considering long run approach is inflation. In the assessment of the viability of
the project, the management has estimated that inflation would not have significant

9
CORPORATE FINANCE MANAGEMENT
impact, however the same may not be the case7. In case there is an inflationary pressure
over the economy, the prices of material and other costs of the business such as labour
costs are likely to increase which would result in more cash outflows and therefore affect
the decisions which are to be taken regarding the project.
 Competitive Pressure: The management of the company is considering to diversify its
operations and start a new product line besides marine products. The management must
consider the competitors who are already established in the market and how they would
have an impact on the operations of the business. In case the market is highly
competitive, it would not be easy to maintain the costs of the business and also enhance
the sales of the business and therefore it would be difficult to survive in such a market.
 Availability of debts and Fluctuation of Interest Rate: Any new project requires
appropriate amount of funds so that the initial investment and obligations relating to the
project can be covered. In this case, the management of Fangio Family Business
Enterprise (FFBE) has considered that the initial investment of the project would be
financed by a loan which would be taken for a long-term period. There is a slight
problem with this is that the accumulation of funds in most new ventures is a challenge
which needs to be considered by the management of the company. Then there is also the
factor that the interest rate associated with such loans are always fluctuating and can
therefore affect the revenue which is generated by the business.
 Governmental Regulations: This is also another factor which must be considered by the
management of Fangio Family Business Enterprise (FFBE) before any decisions can be
taken regarding the proposed business. There are always rules which can be legislative
7 Williams, Edward E., and John A. Dobelman. "Financial statement analysis." World Scientific Book
Chapters (2017): 109-169.

10
CORPORATE FINANCE MANAGEMENT
rules, taxation rules or environmental rules which are associated with the operations of a
business which should be considered by the management of the company before decision
can be taken.
Conclusion
The above discussion shows that the proposed business line which is being considered by
the management of the company as inappropriate from revenue point of view and therefore the
management of the company must decline the proposal at the first place. The application of
NPV, IRR and payback period shows that the project would not be viable option for the business
considering the current estimation and market situation. The above discussion also shows other
factors which can affect the operations and decision-making process regarding the new proposal.
In an overall analysis, it can be concluded that the management of the company must reject the
proposal and look for alternative plans for expanding the operations of the business.

11
CORPORATE FINANCE MANAGEMENT
Reference
Baum, Andrew E., and Neil Crosby. Property investment appraisal. John Wiley & Sons, 2014.
Harris, Elaine. Strategic project risk appraisal and management. Routledge, 2017.
Iooss, Bertrand, and Paul Lemaître. "A review on global sensitivity analysis methods."
In Uncertainty management in simulation-optimization of complex systems, pp. 101-122.
Springer, Boston, MA, 2015.
Mellichamp, Duncan A. "New discounted cash flow method: Estimating plant profitability at the
conceptual design level while compensating for business risk/uncertainty." Computers &
Chemical Engineering 48 (2013): 251-263.
Pivorienė, Agnė. "Real options and discounted cash flow analysis to assess strategic investment
projects." Economics and Business 30, no. 1 (2017): 91-101.
Williams, Edward E., and John A. Dobelman. "Financial statement analysis." World Scientific
Book Chapters (2017): 109-169.
Xu, Wei, Zhi Xiao, Xin Dang, Daoli Yang, and Xianglei Yang. "Financial ratio selection for
business failure prediction using soft set theory." Knowledge-Based Systems 63 (2014): 59-67.