MPA Report: Financial Analysis of Pinto Ltd's New Project Proposal

This report presents a financial analysis of a proposed project by Pinto Ltd, a company facing increased competition. The analysis includes the calculation of Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, Discounted Payback Period, and Profitability Index to assess the project's feasibility. The report also incorporates a risk assessment, considering factors such as changes in product demand, competitor actions, product obsolescence, and margin fluctuations. Sensitivity analyses are performed to evaluate the impact of changes in machine costs and discount rates on the NPV. Based on the findings, the report concludes that the project is financially viable and recommends its acceptance, emphasizing the importance of monitoring machine costs and other key variables. The analysis is conducted using the case study details and assumptions provided in the assignment brief, including sales data, cost structures, and financial projections. The report provides recommendations on whether Pinto Ltd. should proceed with the new product market based on the financial evaluation.

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Table of Contents
Introduction................................................................................................................................2
Project evaluation method..........................................................................................................2
Risk assessment based on base case and sensitivities................................................................4
Conclusion and recommendation...............................................................................................5
References..................................................................................................................................6

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Introduction
Pinto Ltd recently subjected to competition considerable from the overseas
manufacturers those are offering their products at much lower cost compared to Pinto Ltd. To
overcome this situation the company is considering a new project that will move it to the new
product market that is riskier as compared to the present operation. The main objective of the
report is to undertake the financial analysis of proposed project through various approaches
like NPV, payback period, IRR, profitability index and discounted payback period (Almazan,
Chen and Titman 2017).
Project evaluation method
Various methods used for evaluating the feasibility of the project are as follows –
Net present value – it is the value of all the future cash flows whether negative or positive
over the useful life of the asset discounted to the present value. It is a form of the intrinsic
valuation and extensively used in accounting and finance to determine the project value,
capital project, investment security, cost reduction program or anything else that requires
cash flow analysis. Using NPV only, the project is considered as acceptable if the NPV of the
project is positive. On the contrary the project is rejected if the NPV of the project is
negative. Looking into the project proposed project evaluation it can be stated that the NPV is
computed as $45,98,247. As the NPV of the project is positive it is acceptable (Leyman and
Vanhoucke 2017).
Payback period – under capital budgeting approach payback period is considered as the
selection criteria or the deciding factor that helps the business in selecting from the potential
capital projects. Simple payback period determines the times required by the project to pay
back initial outlay of the project from the cash flows produced by the project. On the other

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hand, discounted payback period determines the times required by the project to pay back
initial outlay of the project from the discounted cash flows produced by the project. Project is
accepted if the payback period is less than the useful life of the project, if the company does
not have any preference that requires the project to recover the initial amount in less time.
Looking into the computation it can be stated that the simple payback period of the project is
3.08 years whereas discounted payback period is 2.81 years. Since both the payback periods
are less than the project’s useful life, the project is acceptable (Leyman and Vanhoucke
2017).
Profitability Index – it is the financial tool that indicates whether the project investment shall
be rejected or accepted and it uses time value of the money concept. PI assists in ranking the
investment and selecting the best investment. PI more than one determines that the present
value of the future cash flows is more than the amount of initial outlay and indicates that the
project will earn profit. On the contrary, PI less than one indicates that investment will not be
able to recover the amount of initial outlay. Hence, the PI assists the investors to make
decisions regarding project acceptability. It can be identified from the calculation that the PI
of project is 1.26 that indicates the present value of the future cash flows is more than the
amount of initial outlay and hence the project is acceptable (Talavera et al. 2019).
Internal rate of return – IRR is discount rate at which the net present value of any project is
zero. To be more specific, it is excepted compound annual return rate that can be earned from
the investment or project.IRR is computed for different projects for analysing returns of the
projects. It further allows ranking the projected on the basis of the projected yield. Generally
investment with higher return is selected from the mutually exclusive projects. If any single
project is analysed, the projects is accepted if the rate of return from the project is higher than
the company’s cost of capital. In the given scenario the IRR is 21.7% whereas the cost of the

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capital is 10%. As the IRR is higher than the cost of capital, the project is acceptable (Sim
and Wright 2017).
Risk assessment based on base case and sensitivities
Various risks associated with project evaluation assumptions are as follows –
 Demand for the product may slows down and no buyer can be found for the product
 Competitors may enter into the market with better quality and low prices
 Product may become outdated due to less demand ad storage
 Margins may not be sufficient to cover up the operational costs if the labour costs and
material costs go up (Lefley 2018).
In the above mentioned scenarios sales will be significantly impacted and the
evaluation regarding project feasibility will be of no use.
If the sensitivities are considered it can be identified the following with regard to 3
types of sensitivities –
1. Cost of machine with NPV – it can be identified that if the cost of machine is
increased the NPV will be reduced. From the calculation it can be stated that for
9.09% changes in machine cost NPV will be changed by 11.63%. Further, the
sensitivity of NPV for changes in machine cost is 127.93%. With increase in cost of
machine, NPV will be reduced, hence there is negative correlation (Burns and Walker
2015).
2. Discount rate with NPV – it can be identified that if the discount rate is increased the
NPV will be reduced, hence there is negative correlation. From the calculation it can
be stated that for 16.67% changes in discount rate NPV will be changed by 8.08%.

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Further, the sensitivity of NPV for changes in discounting rate is 48.47% (Laird and
Venables 2017).
3. Cost of machine with NPV – it can be identified that if the cost of machine is
increased the NPV will be reduced, hence there is negative correlation. Further, the
sensitivity of NPV for changes in machine cost is 32.56%.
Hence, NPV is most sensitive to cost of the machine.
Conclusion and recommendation
From the above it can be concluded that from all the evaluation approaches it is
identified that the project is feasible as the NPV is positive, IRR is more than cost of capital,
PI is more than 1 and payback period is less than 5 years. Further, the NPV is most sensitive
to machine cost which can be known before investing into the project and hence, risk level is
low. It is therefore recommended to accept the project.

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References
Almazan, A., Chen, Z. and Titman, S., 2017. Firm Investment and Stakeholder Choices: A
Top‐Down Theory of Capital Budgeting. The Journal of Finance, 72(5), pp.2179-2228.
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.
Laird, J.J. and Venables, A.J., 2017. Transport investment and economic performance: A
framework for project appraisal. Transport Policy, 56, pp.1-11.
Lefley, F., 2018. An exploratory study of team conflict in the capital investment decision-
making process. International Journal of Managing Projects in Business.
Leyman, P. and Vanhoucke, M., 2017. Capital-and resource-constrained project scheduling
with net present value optimization. European Journal of Operational Research, 256(3),
pp.757-776.
Sim, T. and Wright, R.H., 2017. Stock Valuation Using the Dividend Discount Model: An
Internal Rate of Return Approach. In Growing Presence of Real Options in Global Financial
Markets (pp. 19-32). Emerald Publishing Limited.
Talavera, D.L., Muñoz-Cerón, E., Ferrer-Rodríguez, J.P. and Pérez-Higueras, P.J., 2019.
Assessment of cost-competitiveness and profitability of fixed and tracking photovoltaic
systems: The case of five specific sites. Renewable Energy, 134, pp.902-913.