ACC00716 Finance S1 2018: Analyzing Pinto Limited's Project

This case study presents a financial analysis of Pinto Limited's proposed project, evaluating its viability through investment appraisal techniques. It includes calculations of Net Present Value (NPV), Internal Rate of Return (IRR), payback period, discounted payback period, and profitability index. The analysis considers factors such as sales volume, sales price, cost of goods sold, administrative expenses, rent, depreciation, and tax. A memo to the CEO justifies the recommendation based on the project's positive attributes and potential for maximizing profit. Scenario and sensitivity analyses are conducted to assess the project's resilience under varying conditions. The study concludes that the project is financially viable and recommends its commencement to increase firm value.

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

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Table of Contents
1. Financial Significance of the Proposed project:.....................................................................2
2. Conducting Memo to Pinto’s CEO explaining and justifying the recommendation for the
proposed project:........................................................................................................................4
Reference and Bibliography:......................................................................................................8

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1. Financial Significance of the Proposed project:
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Sales Volume
200,000 300,000 450,000 225,000 112,500
Sales price $
75
$
77
$
80
$
82
$
84
Revenue $
15,000,00
0
$
23,175,000
$
35,805,375
$
18,439,768
$
9,496,481
Cost of goods sold $
9,000,000
$
13,905,000
$
21,483,225
$
11,063,861
$
5,697,888
General and
administrative expenses
$
1,000,000
$
1,050,000
$
1,102,500
$
1,157,625
$
1,215,506
Rent $
250,000
$
250,000
$
250,000
$
250,000
$
250,000
Depreciation $
3,000,000
$
3,000,000
$
3,000,000
$
3,000,000
$
3,000,000
Profit before Tax $
1,750,000
$
4,970,000
$
9,969,650
$
2,968,282
$
(666,914)
Tax $
525,000
$
1,491,000
$
2,990,895
$
890,485
$
(200,074)
Profit after Tax $
1,225,000
$
3,479,000
$
6,978,755
$
2,077,798
$
(466,840)
Value $ $ $ $ $

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4,225,000 6,479,000 9,978,755 5,077,798 2,533,160
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Value $
4,225,000
$
6,479,000
$
9,978,755
$
5,077,798
$
2,533,160
Net working capital $
(3,000,000)
$
3,000,000
Initial investment $
(15,000,000)
Cash Flow $
(18,000,000)
$
4,225,000
$
6,479,000
$
9,978,755
$
5,077,798
$
5,533,160
Year Cash Flow Dis-factor Dis-cash flow Cum cash flow Dis-Cum cash flow
0 $ (18,000,000) 1 $ (18,000,000) $ (18,000,000) $ (18,000,000)
1 $ 4,225,000 0.9091 $ 3,840,909 $ (13,775,000) $ (14,159,091)
2 $ 6,479,000 0.8264 $ 5,354,545 $ (7,296,000) $ (8,804,545)
3 $ 9,978,755 0.7513 $ 7,497,186 $ 2,682,755 $ (1,307,359)
4 $ 5,077,798 0.6830 $ 3,468,204 $ 7,760,553 $ 2,160,845
5 $ 5,533,160 0.6209 $ 3,435,657 $ 13,293,713 $ 5,596,502
Particulars Value
NPV $ 5,596,502
IRR 21%
Payback period 2.73 years

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Discounted payback period 3.38 years
Profitability Index 1.31
2. Conducting Memo to Pinto’s CEO explaining and justifying the recommendation for
the proposed project:
To: The CEO (Pinto Limited)
From: Financial Analyst
Date: 19-05-2018
Subject: Analysing the new project and detecting its financial viability
Sir,
The financial viability of the proposal could be identified with the help of investment
appraisal techniques, which allow the organization to gauge into the investment scope.
Furthermore, the financial feasibility of the project is determined by evaluating the cash
inflows and outflows conducted throughout the project life. The memo aims in identifying
and highlighting the positive and negative attributes of the proposed project, which could
allow Pinto Limited to improve its current financial position. The proposed project is
prepared with the help of an external consultant, which helps in understanding the demand
and prospects of the particular project. Adequate fees are paid to be Consultant for the
services provided on the proposed project, while the expense is not recorded in the evaluation
and is considered an expense of the organization and not the project. The expense is actually
referred to as a sunk cost and cannot be attached with the proposed projects as initial
investment (Li and Trutnevyte 2017).

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Moreover, the setup location for the project is owned by the organization, which was
previously let out for rent purposes. The company was getting current of $250,000 from the
premises which will be used by the new project. Hence, the decision is taken to deduct the
rental income that was generated by the company from the project to identify its actual
financial viability. This would help in understanding the extra income that will be provided
by the project if the premise was not used for rent purposes. Lastly, it is also assumed that the
equipment and plant is depreciated every year and does not have any Salvage value after the
completion of 5 years. Moreover, the cash flow that is generated from the project is at the end
of the years which could help in analyzing the actual cash inflow obtained by a project
(Kengatharan and Clamenthu 2017).
The analysis of investment appraisal techniques such as Net present value, internal rate of
return, payback period, discounted payback period, and profitability index in the case of
positive attributes of the project. The evaluation directly indicates that NPV of the project is
the higher than zero, while the internal rate of return is higher than the cost of capital.
Moreover, the payback period and discounted payback period is less than the project useful
life, while the profitability index is greater than 1. The above attributes directly indicate a
positive vibe for the new project, which would allow Pinto Limited to generate higher rate of
return from investment.
Optimistic Scenario Value
Unit sales growth 60%
Unit sales de-growth 40%
Price Hike 5%
NPV $ 10,283,558.60

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Pessimistic Scenario Value
Unit sales growth 20%
Unit sales de-growth 60%
Price Hike 1%
NPV $ (1,306,256.11)
However, conducting the uncertainty analysis such as scenario analysis and sensitivity
analysis could eventually help in identifying the financial viability of the project. According
to the scenario analysis, both optimistic and pessimistic scenarios are evaluated for the new
project. This relatively helps in understanding the level of profits or losses, which could incur
due to the changes in certain assumptions (Fokkema, Buijs and Vis 2017).
10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30%
$(4,000,000)
$(2,000,000)
$-
$2,000,000
$4,000,000
$6,000,000
$8,000,000
Net Present Value
The above figure indicates the sensitivity analysis of the project when the cost of capital
Prices for the project. The project on reaching 22% will relatively provide negative NPV, as
the cash flow is not adequate to support rising discount rate of the company. From this
revaluation it could be identified that the project will not increase up to a 21% discounting
date and provides a question for the returns that will be generated from investment.

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After analyzing all the Investment appraisal techniques, it could be identified that the project
is a viable approach which could allow Pinto limited to maximize its profit overtime. Hence,
the company should commence with the proposed project, as it delivers positive cash flow
and will increase firm value in future.
Sincerely,
Financial Analyst

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Reference and Bibliography:
DeBoeuf, D., Lee, H., Johnson, D. and Masharuev, M., 2018. Purchasing power return, a new
paradigm of capital investment appraisal. Managerial Finance, (just-accepted), pp.00-00.
Fokkema, J.E., Buijs, P. and Vis, I.F., 2017. An investment appraisal method to compare
LNG-fueled and conventional vessels. Transportation Research Part D: Transport and
Environment, 56, pp.229-240.
Hicks, C.L., 2017, July. MODERN PROJECT INVESTMENT APPRAISAL: RETURN TO
SIMPLICITY. In Process Optimisation: A Three-Day Symposium Organised by the Midlands
Branch of the Institution of Chemical Engineers and Held at the University of Nottingham, 7–
9 April 1987 (No. 61, p. 53). Elsevier.
Hsiao, P.C.K. and Kelly, M., 2018. Investment considerations and impressions of integrated
reporting: Evidence from Taiwan. Sustainability Accounting, Management and Policy
Journal, 9(1), pp.2-28.
Kengatharan, L. and Clamenthu, P.D., 2017. Use of Capital Investment Appraisal Practices
and Effectiveness of Investment Decisions: A Study on Listed Manufacturing Companies in
Sri Lanka. Asian Journal of Finance & Accounting, 9(2), pp.287-306.
Laird, J.J. and Venables, A.J., 2017. Transport investment and economic performance: A
framework for project appraisal. Transport Policy, 56, pp.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, pp.89-109.
Lizieri, C., 2018. Property ownership, leasehold forms and industrial change. In Industrial
Property (pp. 181-194). Routledge.