Financial Project: WACC and NPV Analysis and Recommendations

This financial analysis project evaluates two machine investment options (Machine A and Machine B) using Weighted Average Cost of Capital (WACC) and Net Present Value (NPV) calculations. The project begins with the calculation of WACC, considering the cost of equity (12.90%) and cost of debt (6%), along with their respective weights. The analysis then proceeds to calculate the NPV for each machine over a period of 8-10 years, using a discounting rate of 12.18%. Machine B demonstrates a significantly higher NPV (7432635658.37) compared to Machine A (6173295768.53), leading to the recommendation that the firm invest in Machine B due to its potential for greater profitability and positive future cash flows. The project highlights the importance of NPV as a key metric in investment decision-making.

FINANCIAL ANALYSIS

TABLE OF CONTENTS
Calculations for WACC...................................................................................................................3
RECOMMENDATION...................................................................................................................4

Calculations for WACC
Weight After tax
Total
weight
v (Total assets) 35000000
Weight of equity 65.71% 3.94% 2.59% 0.0847714286 0.08
Weight of debt 34.29% 6.86% 2.35% 0.0205714286 0.02
cost of equity 12.90% 0.0164571429 0.02
Cost of debt 6.00% WACC 4.94% WACC 12.18%
NPV of Machine A
Machine A
Years cash flow
Discounting factor
@12.18 Present value
0 400000
1 1242782500 0.893 1109627232.14
2 1242782500 0.797 990738600.13
3 1242782500 0.712 884588035.83
4 1242782500 0.636 789810746.28
5 1242782500 0.567 705188166.32
6 1242782500 0.507 629632291.35
7 1242782500 0.452 562171688.71
8 1242782500 0.404 501939007.78
Total present value 6173695768.53
Initial investment 400000.00
NPV 6173295768.53
NPV of Machine B
Machine B
Years Cash flow Discounting factor @12.18% Present value

0 600000
1 1315565000 0.893 1174611607.14286
2 1315565000 0.797 1048760363.52041
3 1315565000 0.712 936393181.71465
4 1315565000 0.636 836065340.816652
5 1315565000 0.567 746486911.443439
6 1315565000 0.507 666506170.931642
7 1315565000 0.452 595094795.47468
8 1315565000 0.404 531334638.816679
9 1315565000 0.361 474405927.514892
10 1315565000 0.322 423576720.995439
Total present value 7433235658.37134
Initial investment 600000
NPV 7432635658.37134
RECOMMENDATION
In accordance with the costs of both the machineries such as Inpatient Machine A and
Outpatient Machine B it can be said that the there has been analysis on the basis of discounting
factors. Therefore, in relation with such analysis it can be said that Machine B is more profitable
for the business. Therefore, there has been favourable outcomes on the basis of WACC rate.
Thus, in order to analyse the WACC rate which has been determined on the basis of calculating
the costs of equity and costs of debts. However, the cost of equity has been analysed at 12.90%
while cost of debt at 6%. The weight of equity and debt has been analysed as 65.71% and
34.29%. The after tax weight was 3.94% for equity and 6.86% for debts. Additionally, the total
weight Equity as 2.59% while debt as 2.35% which comprises the WACC will be 4.94%. On the
other side, the tax free rate of WACC to be consider than the outcomes will be derived as
12.18%. Therefore, on the basis of such outcomes these machineries has bee discounted as on the
rate of 12% which was rounded off.
Therefore, after analysing the Net present value of these machineries the outcomes for
machinery A was 6173295768.53 which were in context with the initial investments of 400000.