Financial Analysis and Decision Making: Project Evaluation Assignment

This finance assignment presents a detailed analysis of two investment projects, MMDC and DYOD, evaluating their financial viability using various metrics. The assignment begins by calculating free cash flow for each project over a period of eleven years, considering EBIT, tax rates, and depreciation. Terminal values are then computed, followed by a Net Present Value (NPV) analysis, incorporating discount rates and present values of cash inflows. The assignment further explores the importance of depreciation in financial statements and cash budgeting. Finally, it calculates and compares the payback periods and profitability indices for both projects to determine the most suitable investment, considering both short-term and long-term financial perspectives. The analysis includes comprehensive tables and calculations to support the financial conclusions.

FINANCIAL ASSIGNMENT

Table of contents
Question 1..................................................................................................................................................3
Question 2..................................................................................................................................................3
Question 3..................................................................................................................................................4
Question 4..................................................................................................................................................5
Question 5..................................................................................................................................................6
Question 6..................................................................................................................................................7
Question 7..................................................................................................................................................9
Question 8..................................................................................................................................................9
References................................................................................................................................................11
Page 2 of 12

Question 1
Free cash flow of project MMDC
Rate of tax
(T)
40% 40
%
40
%
40
%
40
%
40
%
40
%
40% 40% 40% 40%
EBIT (1-T) -750 350 596 766 835 902 974 1,05
2
1,13
6
1,22
7
1,32
5
Free cash
flow
-
2,22
0
-450 596 766 653 706 762 823 889 960 1,03
7
Free cash flow of project DYOD
Rate of
tax (T)
40% 40% 40
%
40% 40% 40% 40% 40% 40% 40% 40%
EBIT
(1-T)
-721 0 330 1,07
7
1,634 1,66
8
1,76
7
1,87
4
1,98
6
2,10
5
2,23
1
Free
cash flow
-
5,33
1
0 330 1,07
7
-248 1,27
8
1,35
5
1,43
6
1,52
2
1,61
3
1,71
0
Question 2
MMDC
Terminal
value
26882.5
9
DYOD
Terminal 44338.52
Page 3 of 12

value
Question 3
MMDC
Computation of Net Present Value
No of years Year Operating
profit
Depreciatio
n
Net
profit
Profit
after tax
Cash
flow after
tax
Discounting
factor @
8.4%
Present
value of
cash inflows
1 201
0
-1,250 0 -
1,250
-1,250 -1,250 0.922509225 -
1153.13653
1
2 201
1
0 152.2 -152 91 244 0.85102327 207.241186
8
3 201
2
994 152.2 842 1,085 1,238 0.785076818 971.548263
4
4 201
3
1277.3 152.2 1,125 1,369 1,521 0.724240607 1101.4396
5 201
4
1391.8 152.2 1,240 1,483 1,635 0.668118641 1092.58777
6
6 201
5
1503.1 164.4 1,339 1,602 1,766 0.61634561 1088.55263
5
7 201
6
1623.46 177.5 1,446 1,730 1,907 0.568584511 1084.55221
1
8 201
7
1753.27 191.7 1,562 1,868 2,060 0.524524456 1080.51513
5
9 201
8
1893.3 207.1 1,686 2,018 2,225 0.48387865 1076.46547
7
10 201
9
2045 223.6 1,821 2,179 2,403 0.446382518 1072.55006
11 202 2208.5 241.5 1,967 2,353 2,595 0.411791991 1068.55903
Page 4 of 12

0 8
Present value of cash inflows 8690.87485
Present value of initial investment 6811
Net Present Value 1879.87485
DYOD
Computation of Net Present Value
No of years Year Operating
profit
Depreciatio
n
Net
profit
Profit
after tax
Cash flow
after tax
Discounting
factor @
8.4%
Present
value of
cash
inflows
1 201
0
-1,201 0 -
1,201
-1,201 -1,201 0.92250922
5
-1107.9336
2 201
1
0 0 0 0 0 0.85102327 0
3 201
2
550.3 309.7 241 736 1,046 0.78507681
8
821.04903
7
4 201
3
1794.3 309.7 1,485 1,980 2,290 0.72424060
7
1658.3806
3
5 201
4
2723.7 309.7 2,414 2,910 3,219 0.66811864
1
2150.8208
9
6 201
5
2779.2 436.2 2,343 3,041 3,477 0.61634561 2143.1076
5
7 201
6
2945.8 462.4 2,483 3,223 3,686 0.56858451
1
2095.5978
2
8 201
7
3122.6 490.1 2,633 3,417 3,907 0.52452445
6
2049.1911
7
9 201
8
3310.1 519.5 2,791 3,622 4,141 0.48387865 2003.8866
5
10 201 3508.56 550.7 2,958 3,839 4,390 0.44638251 1959.4764
Page 5 of 12

9 8 1
11 202
0
3719 583.8 3,135 4,069 4,653 0.41179199
1
1916.1010
8
Present value of cash inflows 15689.677
7
Present value of initial investment 6811
Net Present Value 8878.6777
5
As per the calculated tables it is observed that the riskiness of the projects is almost similar and
discount rates and the risks are to be analysed and observed properly in order to identify a suitable job.
The suitable discount rate for proper project should be of 8.4%.
Question 4
According to the international accounting standard the depreciation is non cash entry which is done in
order to maintain proper values of the company assets. Charging depreciation is essential from a firm
point of view as the assets that are used in the company operations and activities are diminishing every
day. The amount of depreciation are needed to be calculated every year before the annual report and
financial statements as the company needs to maintain the actual value of the assets and need to show
their original financial conditions in those reports. Thus, the preparation of depreciation is essential in
cash budgeting process (Brigham, Eugen, and Michael, 2013). As the assets are essential aspect of the
firm’s financial activities and valuations. The investments and the loans done by the financial
organisations depend on the valuation sand utilisation of the firm assets, thus in order to maintain
smooth and efficient operation of the firm activities the firm needs to create and maintain depreciation
accounts (Grant, Robert, 2016).
Question 5
MMDC
Computation of Net Present Value
Page 6 of 12

No of years Year Operating
profit
Depreciatio
n
Net
profit
Profit
after tax
Cash
flow after
tax
Discounting
factor @
8.4%
Present
value of
cash inflows
1 201
0
-1,250 0 -
1,250
-1,250 -1,250 0.922509225 -
1153.13653
1
2 201
1
0 152.2 -152 91 244 0.85102327 207.241186
8
3 201
2
994 152.2 842 1,085 1,238 0.785076818 971.548263
4
4 201
3
1277.3 152.2 1,125 1,369 1,521 0.724240607 1101.4396
5 201
4
1391.8 152.2 1,240 1,483 1,635 0.668118641 1092.58777
6
6 201
5
1503.1 164.4 1,339 1,602 1,766 0.61634561 1088.55263
5
7 201
6
1623.46 177.5 1,446 1,730 1,907 0.568584511 1084.55221
1
8 201
7
1753.27 191.7 1,562 1,868 2,060 0.524524456 1080.51513
5
9 201
8
1893.3 207.1 1,686 2,018 2,225 0.48387865 1076.46547
7
10 201
9
2045 223.6 1,821 2,179 2,403 0.446382518 1072.55006
11 202
0
2208.5 241.5 1,967 2,353 2,595 0.411791991 1068.55903
8
Present value of cash inflows 8690.87485
Present value of initial investment 6811
Net Present Value 1879.87485
Page 7 of 12

DYOD
Computation of Net Present Value
No of years Year Operating
profit
Depreciatio
n
Net
profit
Profit
after tax
Cash flow
after tax
Discounting
factor @
8.4%
Present
value of
cash
inflows
1 201
0
-1,201 0 -
1,201
-1,201 -1,201 0.92250922
5
-1107.9336
2 201
1
0 0 0 0 0 0.85102327 0
3 201
2
550.3 309.7 241 736 1,046 0.78507681
8
821.04903
7
4 201
3
1794.3 309.7 1,485 1,980 2,290 0.72424060
7
1658.3806
3
5 201
4
2723.7 309.7 2,414 2,910 3,219 0.66811864
1
2150.8208
9
6 201
5
2779.2 436.2 2,343 3,041 3,477 0.61634561 2143.1076
5
7 201
6
2945.8 462.4 2,483 3,223 3,686 0.56858451
1
2095.5978
2
8 201
7
3122.6 490.1 2,633 3,417 3,907 0.52452445
6
2049.1911
7
9 201
8
3310.1 519.5 2,791 3,622 4,141 0.48387865 2003.8866
5
10 201
9
3508.56 550.7 2,958 3,839 4,390 0.44638251
8
1959.4764
1
Page 8 of 12

11 202
0
3719 583.8 3,135 4,069 4,653 0.41179199
1
1916.1010
8
Present value of cash inflows 15689.677
7
Present value of initial investment 6811
Net Present Value 8878.6777
5
Question 6
MMDC
Payback period
Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Present
value of
cash
inflows
-
1153.
1365
31
207.2
41186
8
971.5
4826
34
1101.
4396
1092.
5877
76
1088.5
52635
1084.552
211
1080.
5151
35
1076.
4654
77
1072.
5500
6
1068.
5590
38
Accumul
ated cash
flows
-
1153.
1365
31
-
945.8
95344
6
25.65
2918
87
1127.
0925
18
2219.
6802
94
3308.2
32929
4392.785
14
5473.
3002
75
6549.
7657
52
7622.
3158
12
8690.
8748
5
Payback
period
2.976
7096
45
Profitability index
Profitability index 1.276005704
Page 9 of 12

DYOD
Payback period
Year 2010 2011 201
2
2013 2014 2015 2016 2017 2018 2019 2020
Present
value
of cash
inflows
-
1107
.93
0 821.
049
1658
.381
2150.8
20891
2143
.108
2095.5
97816
2049.1
9117
2003
.887
1959
.476
1916
.101
Accum
ulated
cash
flows
-
1107
.93
-
1107.9
33579
-
286.
885
1371
.496
3522.3
16975
5665
.425
7761.0
22438
9810.2
136
1181
4.1
1377
3.58
1568
9.68
Paybac
k
period
3.17
2991
Profitability index
Profitability index 2.303579
Page 10 of 12

Question 7
According to the calculated tables it is observed that the identification of the suitable project after
analysing all the completed calculations is required.
If the payback periods are to be considered than the MMDC project is to be considered
Now if the profitability index is considered than the DYOD project is considered.
Question 8
A budget constraint is made by considering the accounting entries and statements that are made during
the accounting year of the organisation. A budget constraint is essential as it is essence of all the
financial allocations of the firm for the accounting year (Vogel, Harold L). Thus it is important to
create such a budget constraint that covers all the essential aspects of the firm’s financial operations
and performances. The financial decisions and marketing strategies are depended on the quality of the
budget thus it needs to be of high quality (Bodie, 2013).
Page 11 of 12