Capital Expenditure Analysis of Sion Plc - Finance Assignment

This finance assignment delves into Sion Plc's capital expenditure decision, evaluating the viability of a new product introduction. It begins by outlining the project's critical assumptions, including initial investment, revenue projections, and cost considerations. The analysis calculates the Net Present Value (NPV) and Internal Rate of Return (IRR) to assess the project's profitability, concluding that the project is viable due to a positive NPV and an IRR exceeding the cost of capital. The report also explores the impact of changes in selling price and quantity through sensitivity and scenario analysis, demonstrating how these factors influence project profitability. The document uses investment appraisal techniques to identify the financial viability of the proposed investment. Desklib is a platform where students can find past papers and solved assignments.

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

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Table of Contents
Question 1: Sion Plc: A Capital Expenditure Decision.............................................................2
a) Stating and depicting the critical assumption of the project:.................................................2
b) Using sensitivity analysis and scenario analysis to improve capital budgeting analysis:.....5
Reference and Bibliography:......................................................................................................6

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Question 1: Sion Plc: A Capital Expenditure Decision
a) Stating and depicting the critical assumption of the project:
Particulars Value
New Plant and Machinery 5,000,000
Plant life 4
Depreciation 5,000,000 / 4
Depreciation 1,250,000
Particulars 1 2 3 4
Revenue (+) 20,000 * 250 20,000 * 250 20,000 * 250 20,000 * 250
Revenue (+) £ 5,000,000 £ 5,000,000 £ 5,000,000 £ 5,000,000
Variable cost (-) 20,000 * 120 20,000 * 120 20,000 * 120 20,000 * 120
Variable cost (-) £ 2,400,000 £ 2,400,000 £ 2,400,000 £ 2,400,000
Fixed cost (-) £ 250,000 £ 250,000 £ 250,000 £ 250,000
Depreciation (-) £ 1,250,000 £ 1,250,000 £ 1,250,000 £ 1,250,000
Salvage value (+) £ - £ - £ - £ 900,000
Profit Before Tax £ 1,100,000 £ 1,100,000 £ 1,100,000 £ 2,000,000
Tax (-) £ 1,100,000 *
30%
£ 1,100,000
* 30%
£ 1,100,000
* 30%
£ 2,000,000
* 30%
Tax (-) £ 330,000 £ 330,000 £ 330,000 £ 600,000
Profit After Tax £ 770,000 £ 770,000 £ 770,000 £ 1,400,000

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Particulars 0 1 2 3 4
PAT (+) £ 770,000 £ 770,000 £ 770,000 £ 1,400,000
Depreciation (+) £ 1,250,000 £ 1,250,000 £ 1,250,000 £ 1,250,000
Net working capital
(+)
-£ 120,000 £ - £ - £ - £ 120,000
Initial investment -£ 6,120,000
Free cash Flow -£ 6,240,000 £ 2,020,000 £ 2,020,000 £ 2,020,000 £2,770,000
Particulars 0 1 2 3 4
Free cash Flow (A) -£ 6,240,000 £ 2,020,000 £ 2,020,000 £ 2,020,000 £2,770,000
Discounting factor (B) 1 0.8772 0.7695 0.6750 0.5921
Present value
(C=A*B)
-£ 6,240,000 £ 1,771,930 £ 1,554,324 £ 1,363,442 £ 1,640,062
NPV £ 89,759
IRR 15%
From the evaluation of above table, it could be identified that the project is viable as
NPV is positive and IRR is more than cost of capital. Therefore, the company needs to accept
the project, as it will increase gain of the organisation. The profit is due to the high cash
inflow incurred from the new project. However, due to lack of sufficient information
overhead cost and rent cost is not used in the valuation process. Therefore, it is assumed that
overhead cost is already incurred in the valuation, where no separate overhead cost is used for
the calculation. In addition, the rent cost is not taken into consideration, as the company has
space available, which could be used for the project and no extra cost needs to be incurred.

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Some researchers stated that investment appraisal techniques allow organisation to identify
financial viability of the proposed investment1.
The initial investment is derived by adding research and development cost, Plant and
machinery cost, and after-tax value of the owned equipment. This help in detecting the initial
investment which is conducted for starting the project. The tax valuation and deprecation of
old machine is not provided in detail in the assessment, where the old machine is used for the
project and no future evaluation of the deprecation is been conducted. The material cost and
selling price of the project is provided in the assessment, which helps in deriving the overall
cash inflow and outflow conducted by the new project. The fixed cost of the project is
mentioned, which comprises of overhead cost incurred during the operations. The working
capital of the project is also mentioned, which comprises of the initial investment conducted
by the project and is recorded after the completion of four years. The entire information,
which is been used in the preparation of the net present value is depicted and critically
analysed.
b) Using sensitivity analysis and scenario analysis to improve capital budgeting analysis:
-60.00% -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00%
-£6,000,000.00
-£4,000,000.00
-£2,000,000.00
£-
£2,000,000.00
£4,000,000.00
£6,000,000.00
£8,000,000.00
-£3,000,000.00
-£2,000,000.00
-£1,000,000.00
£-
£1,000,000.00
£2,000,000.00
£3,000,000.00
£4,000,000.00
1 Ifrim, S, "Perception Portfolio Problem in Property Investment Appraisal - Case of Energy
Infrastructure Assets.". in SSRN Electronic Journal, , 2015

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-60.00% -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
From the overall evaluation of the scenario analysis increment in with selling price or
quantity could eventually allow the organisation to generate profits from the project.
Therefore, with the increment in volumes and selling price the project could help in
improving the level of profits, which could be generated from investment. In this context,
some researchers mentioned that scenario analysis mainly allows the organisation in
detecting the level of quantity and price that needs to be maintained by the project for
achieving a profitable condition. Higher income from the project is achieved by raising the
levels of selling price and production units.
Reference and Bibliography:
Baum, Andrew E., and Neil Crosby. Property investment appraisal. John Wiley & Sons,
2014.
Ifrim, S, "Perception Portfolio Problem in Property Investment Appraisal - Case of Energy
Infrastructure Assets.". in SSRN Electronic Journal, , 2015