Philip Morris International: Project Investment Analysis Report

This report analyzes Philip Morris International's (PMI) project investment, focusing on its shift from tobacco to electrical cigarettes. It assesses the current situation, project effects (both positive and negative), and benefits, including financial and non-financial aspects. The report delves into investment valuation methods, such as Net Present Value (NPV) and Adjusted Present Value (APV), along with Weighted Average Cost of Capital (WACC). It identifies project risks, including budget, cost, and operational risks, and explores alternative scenarios if the project were rejected. The report recommends project investment based on a positive APV, suggesting that the project will increase profitability and attract customers through environmentally friendly products. Financial calculations, including cost of equity and debt, are presented to support the recommendation.

FINANCE

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY ..................................................................................................................................3
Rational for the project ...............................................................................................................3
Project effects and benefits ........................................................................................................4
Project financials .......................................................................................................................4
Project risks.................................................................................................................................5
Alternative scenarios...................................................................................................................5
Recommendation.........................................................................................................................5
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Finance is related to choosing the sources of funds for investing in the project. It assists
in making decision regarding using the sources of funds such as equity of debt for the investment
purpose. In this assignment, Philip Morris International is involved in cigarette and tobacco
manufacturing. The company is going into a shift from tobacco to the electrical cigarette
manufacturing in order to manufacture the environmentally friendly products which will assist in
reducing the harm o the environment as well the customers will be protected. In this assignment
it will include the current situation of the company. Moreover, it will provide understanding
about the project effect and benefit with regards to financial and non – financial. Also, It will
provide the details of the investment valuation methods. It will assist in identifying the risk
associated with the investment or the project. This assignment will also provide the alternative
scenario regarding the investment if the firm does not invest in this project.
MAIN BODY
Aim: To identify the value of the project for sustainable growth . A study on Philip Morris
International
Objective
 To outline the value of the project on the basis of all equity financing
 To identify the value of the project with 50% of debt financing of initial investment.
 To identify the investment valuation method for the project.
 To provide recommendation regarding the project investment to the company.
Rational for the project
The current situation of the company is that it is undergoing a shift from tobacco based
product to the electrical cigarettes as there has been increase in the environmental friendly
product and the customers are more attracted to those products and thus the company wasn’t to
invest in this project. The company has decided to evaluate the proposal to acquire Teracycle in
order to use the recycled plastic for the production of electrical cigarettes (Brooks, 2019). With
the help of this the company will be able to reduce the material cost in the future and it also aims
to become the suppliers of its competitors. This project will helps in increasing the market share
of the company and it will provide safety to the health of the consumers.

Project effects and benefits
The project effect means the positive and negative effects of the project on the company.
The project positive effect can be that it is successfully completed with the help of efficient
resources and the financing. The Philip Morris International can use the equity financing as well
as debt financing of the funding of project (Gitman, Juchau and Flanagan, 2015). The project
effect can leads to failure of the project due to lack of sufficient funds, human resource,
Management of the activities related to the project etc. The project benefits consist of revenue
from the success of the project, it improves the efficiency. The project of Philip Morris will
provide benefit to the company because it will increase the goodwill of the company as it will
provide the environmental friendly products which will increase their customer base and thus the
profitability of the firm will be increase (Minsky, 2016). The non financial benefit of the project
will consist of increase in the customer satisfaction and the brand image f the company with the
help of producing environmental friendly products.
Project financials
The investment valuation methods are those with the help of which the firm is able to
identify the profit associated with the project on the basis of which the company is able to make
the investment decision regarding investing in that project or not. The investment of the
company is valued on the basis of Net present value which assists in identifying the present
value of the future cash flows. It take into consideration the cash inflows and the initial
investment and the discounted rate which assist in identifying the discounted value of the cash
flows from which the initial investment is deducted in order to determine the present value of
the project (Shoup, 2017). There are other ways through which the firm is able to determine the
cost of capital through the use of the different sources of funding for the project investment such
as equity and debt.
The equity funding includes the use of issue of shares to the general public in order to
acquire the funds which can be investment in the project (Damodaran, 2016). Weighted average
cost of capital assist in determining the capital requirement of the project on the basis of which
the firm is able to identify the cost required for the project. In this project, The investment
valuation method which will be used is adjusted present value which the net present value of the
cash flows on the basis of which the firm will be able to identify the net present value of the

future cash flows on the basis of which the firm can decide whether to accept the project or not
on the basis of the net present value.
Project risks
The risk associated with the project consists of budget risk, cost risk, resource risk,
allocation of the cost to different activities is improper. There is also risk of communication with
the project teams due to which there are chances of the failure of project. Risk of not
completing the project in the stipulated time frame (Horst, 2018). Project risk are the
uncertainties which can occur and can Have a great impact on the project success because it can
leads to failure of the project. The project risk consist of inefficiency in the allocation of the cost
and expenses related to the project due to which the there is budget risk as the budget is not
prepared in the appropriate manner. If the project is having the risk of budget in which the cost
associated with the project overruns than the firm will not have enough funds for the completion
of the project which hamper the project.
The risk related to the sponsor of the project can have a significant impact on the project.
If the team member involved in the project are inefficient and have lack of knowledge and skills
then it can leads to the failure of the project. Operation risk related to the project such as failure
of organization processes. Health and safety of the human resources is the risk which have a
great impact on the project. So, it is important to take into consideration the risk associated with
the project on the basis of which the firm is able to take considerable steps when this risk can
occur (Cleverley and Cleverley, 2017). The non financial risk related to the project consist of
fraud , misconduct, political risk etc. which have a great impact on the project due to which it
can leads to failure of the project.
Alternative scenarios
If the company does not invest in the project which means if it reject the project there
may be various scenarios for the rejection of the project such as if any of the risk associated with
the project occurs than it ill leads to project failure and thus the firm will not invest in the project.
Moreover, there is operating risk, risk associated with the cost allocation etc. can occur in the
project which can affect the project.
Recommendation
On the basis of the adjusted present value it is being recommended to the firm that it
should invest in this project because the net present value identified is positive which shows that

the project is beneficial for the firm. Moreover, it should accept the project because it will assist
in increasing the profitability of the firm as well have the positive impact on the customers due to
manufacturing of the environmental friendly products. By accepting this project the firm will be
able to increase the market share of the firm and will attract more customers towards the firm.
Cost of equity
Particular Formula
amou
nt
Risk free rate of
return 2.12%
Market rate of
return
17.12
%
Beta value 0.95
Cost of equity
risk free rate of return + beta *( market rate of return - risk free
rate of return 15%
Cost of debt 3.54%
Tax rate 35%
On the basis of the above calculation which has provide information regarding the project
funding with wholly with all equity. It assist in identifying the cost of equity for the investment
purpose. The cost of equity is being calculated on the basis of capital asset pricing model in
which the cost of equity is determined by considering risk free rate of return, market rate of
return, beta value of the company. The formula used for calculating the cost of acquiring equity
as source of funding for the project is through the use f risk free rate f return in which the bet
value of the company is being added and is being multiplied by the estimated rate of return. The

cost of acquiring equity financing is 15% which is higher and that indicate if the firm chooses
the source of funding as all equity than they have to increase their cost which will leads to
reduction in their profitability (Philip Morris International Inc. (PM), 2019). The cost of debt is
approx 4% which is lower than that of equity and thus if the firm chooses the debt as source of
funding than it will be profitable of the firm to invest in the project Because acquiring equity as
source of fund is higher than that of acquiring debt as source of funding for the project.
Total liability 31759
Total equity 121003
debt to equity ratio 0.26
Weighted average cost of capital
Market value of firm equity 121003
market value of firm debt 31759
cost of equity 15%
cost of debt 3.54%
tax rate 35%
equity + debt 152762
WACC 12%
The weighted average cost of capital provide information regarding the cost for
acquiring the funds through both the source which include equity and debts. The weighted
average cost of capital is being determined by considering both equity and debt. For the
calculation of weighted average cost of capital it is required to have the market value of the firm
equity and debt as well as the cost of equity and debt. The WACC calculated is 12% which
shows if the firm uses both equity and debt as source of fund than the cost which will be incurred
is 12 % for the investment in the project.
Total equity 121003
Total debt 31759
Cash 6593

Enterprise value 146169
Unleavered firm value Total equity-Total debt+ cash 95837
debt
amount 220 Debt amount
cost of
debt 3.54% Cost of debt
Tax rate 35% Interest rate
Interest
rate 17.12% Tax rate 35%
PV of debt financing
Adjusted present value of the project
From the above calculation which has provided information regarding adjusted present
value of the project which is $96223 which is being calculated on the basis of the unlevered
value of the firm and Present value of debt financing. It provide information that the future cash
plows have the present value which is positive and thus it indicate that the project is profitable
for the firm because if the net present value with negative indicate that the project is not
beneficial. The adjusted present value helps in understanding the benefit associated with the
investment and thus on the basis of which the firm is able to make decision regarding their
investment in that project.
CONCLUSION
From the above assignment it has been concluded about the viability of the project on the
basis of adjusted present value It has been identified that the net present value of the project is
positive which indicate that the project is beneficial for the firm and will also be helpful in
increasing their customers base and market share of the firm. It has also identified the weighted
average cost of capital on the basis of which it is identified that the cost of acquiring capital with
both debt and equity is beneficial. The project should be accepted by the firm as it will have
various benefits.