Financial Planning and Analysis for Project Development Optimization

This report provides a comprehensive analysis of project development and optimization, focusing on financial planning and decision-making within a business context, particularly referencing Adidas. It explores the principles of cost-driven project design, accounting principles, and budgeting, emphasizing the importance of financial planning for achieving organizational goals. The report presents two project alternatives, A and B, and employs Net Present Value (NPV) and Internal Rate of Return (IRR) calculations to estimate cash flows and determine the most appropriate course of action. The analysis reveals conflicting results between NPV and IRR methods, leading to a discussion on their advantages and disadvantages. Ultimately, the report underscores the need for careful planning and evaluation, linking financial metrics to the company's mission and vision for effective decision-making.

Running head: PROJECT DEVELOPMENT AND OPTIMIZATION 1
Project Development and Optimization
Students Name
Institutional Affiliation

PROJECT DEVELOPMENTS AND OPTIMIZATION 2
Project Development and Optimization
Introduction
Project development refers to the process of improving a concept by employing
construction of ideas. Optimization, on the other hand, is the practice of making business
operations more effective through the adjustment of the variables used in technical analysis.
Usually, project development requires high levels of project managing. Project management is to
the practice of planning, controlling, coordinating and organizing of the resources in the
organization to ensure efficiency and effectiveness in the achievement of the objectives and
goals of the organization. Most businesses work with a fundamental aim of profit making.
Adidas, in this case, aims at improving the total revenues and overall profitability through sports
shoemaking. Therefore, any decision making in the company should be based on the financial
planning and analysis of the company. Usually, financial planning refers to the process of
making sensible decisions about money that will enable the organization to effectively meet the
goals and objectives of the firm (CISI, 2018). An effective financial plan should include the
books of accounts such as budget, cash flows and financial statements. Cash flow statement,
therefore, supplements the books of account such as income statement and balance sheet
(Murphy, 2018). This report is set to develop the alternatives for decisions making, develop the
estimated cash flows cash flows, choose the most appropriate course of action and use the
technology to decide on parameters affecting the economic analysis.

PROJECT DEVELOPMENTS AND OPTIMIZATION 3
Available projects
It's significant to have the estimated projects before making a decision. Decisions can't be
made in a scenario whereby only on alternative exist. Therefore, the table below shows two
example of projects from which decision making is required.
Year 2015 2016 2017 2018
Project A -2500 1500 1500 1500
Project B -14000 7000 7000 7000
Principles of Cost Driven Project Design
The Net present value (NPV) refers to the total cost of a project including the
construction cost (T) and the yearly cash flows which are usually discounted to the present value
(Park and Chen, 2014). Usually, when NPV becomes Zero, the rate of return of the scheme
which entails the future cash flows is denoted by the Internal Rate of Return (IRR). Therefore,
the IRR refers to the interest rates at which the NPV of all the project equals to zero. IRR
estimates the effectiveness of the project in that a project needs to be rejected upon falling below
a predetermined NPV. Often, an addition maintenance fee (Mp) is always contributed for the
maintenance of the project due to external design factors. Usually, the design factors are
constraints that act as the reference points in designing the optimization design alternatives.
Usually, optimization aims at minimizing the constraints with respect to the input variable used
in the total construction of the project.
Accounting Principles and Budget
The accounting principles form the backbone upon which the current accounting is done.
Firstly, them exists the Accrual principle which denotes that accounting should be recorded upon
the occurrence period rather than the periods when there exist cash flows related to them.
Secondly, the conservatism principle states that liabilities and expenses should be recorded as

PROJECT DEVELOPMENTS AND OPTIMIZATION 4
soon as possible while postponing the revenues and assets until when sure about their
occurrence. Thirdly, the consistency principle that emphasizes that an accounting principle
should be continuously used until another demonstrably new one is found. The cost principle
states that a business should only record the assets, equity investment and liabilities at the start of
the initial purchase. Also there exist a going concern principle which states that the business
starts with an aim of operating continuously into a foreseeable future. The materiality principle
emphasizes on recording all transactions in the accounting records to avoid misleading the
decisions of the people who are reading the financial statements of the company. Additionally,
the reliability principle states that only the transactions which can be proven need to be recorded.
Finally, we have the period principle that states that all the recorded transactions should be done
within a standard time frame
A budget is usually an estimation of business expenses and revenues within a business.
After the formulation process, a budget is always periodically evaluated. In organizations, a
budget is usually an internal tool not recommended to the external parties. Budgeting employs
the accounting principles already discussed in the beginning of this section of the paper.
The figure below shows a typical example of an Adidas budget
Activity Estimated Cost ($1.1 Million)
Adidas Event -$50,000
Gorilla Marketing -&100,000
Advertisement through the television -$640,000
Outdoor -$200,000
Event Winner -$10,000
Expenses of the winners -$100,000

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Project Cost Estimation
The figure bellow shows project A and B cost estimations
A B
General cost ($ million) 4.5 5.6
Planning cost (hundreds of
hours)
10 15
Design cost (hundreds of
hours)
40 60
Engineering cost (hundreds
of hours)
3 8
Construction cost
(hundreds of hours)
10 20
Cost of materials ($
millions)
2 4
Estimate Cashflow
Cash flow refers to the amount of cash that moves away from the organization and the
total amount received by the company. Cash flow is usually expressed through the cash flow
statement. Therefore, a cash flow statement indicates the amount of money generated and used
by the organization during a specified period (CFI, 2018). It's significant to conduct an
estimation of the cash flows engendered from a particular scheme before deciding on the
investment. There are two major methods used in estimation. The two methods used in
estimating cash flows are NPV and IRR calculations. The calculations below illustrate the
findings and applications of the two independent methods.
NPV FOR PROJECT A=
1500 *PVFA AT 8% FOR 3 YEARS
1500*2.5771

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NPV =3865.65-2500
= 1,365
NPV FOR PROJECT B =
7000*PVFA AT 8% for 3 years
7000*2.5771
NPV =18,039.7-14000
= 4039.7
IRR FOR PROJECT A = I/CASH INFLOW
A = 2500/1500
= 1.67
THEREFORE, IRR = 36% (FROM THE TABLES)
IRR FOR B= 14000/7000
= 2.0
THEREFORE, IRR = 21%
The table below indicates a summary of the results generated from the calculation of IRR
and NPV.
Technology A B
IRR 36% 21%
NPV 1365 4039.7
Conclusion on the Result
Different methods provide different method conclusions and alternatives on the projects
in question. A typical example of the scenarios is the IRR and NPV calculations illustrated
above. Following the results indicated in the table above, NPV figures prefer project B to A. On
the other hand, the IRR figures prefer project A to B.

PROJECT DEVELOPMENTS AND OPTIMIZATION 7
Discussion
As already presented in the calculations above, different techniques were used to
determine the best alternative. The analysis includes a critical evaluation of the internal rate of
return the payback period Net Present Value, and the Internal Rate of Return. Different
techniques have different preference hence different results. The Net Present Value, for instance,
preferred project B to A while the IRR prefer project A to B due to the higher percentage of
project A (36%). The payback period, on the other hand, prefers project A to be since it has a
faster return on investment than B which takes 2years for the full return. But since firms no
longer value investments in terms of percentage returns but instead opt for the exact amount it
will give, project B resulted in being the best option available.
In such a case, proper planning is necessary to come up with the most successful project.
The ideology that imperfect planning results into project failure whereas proper planning leads to
the success of the project is highly appreciated. Organizational goals and objectives can only be
successfully met through clear formulation of the courses of action, project aims and realistic
timeframe during the planning process. The perfect planning ideology sounds excellent among
most of the managers but variety of them hurry through the planning period due to adverse
environmental factors thus resulting into the failure of the project. Projects under poor planning
consume vast amounts of money without generating the desired results.
This report provides information in terms of ratio analysis, liquidity and financial
analysis. In this case, the alternatives have conflicting decisions on what exactly to choose and
why. Basing on the net present value method, project A is not preferred due to low-income return
as compared to project B. With the IRR cash flow calculations, project A is preferred to venture

PROJECT DEVELOPMENTS AND OPTIMIZATION 8
B because of the higher percentage. Therefore, the project invites further evaluation to determine
which alternative to pick.
The NPV technique is a straight measure to the dollar contribution on the business
owners, and it doesn't measure the size of the project, in this case, both projects have different
initial investments of 2500 and 14000 which is clear that there returns may end up being
different, and that may be preferred or an advantage over the other. IRR on the other side focuses
more on the shows the return on the original money invested. And in this, project A tends to be
suitable and not B because of the percentage 36%and 21%.
In the revenue recognition principle of accounting, revenue is recognized as soon as the
product is sold or the service is applied. The same ideology applies to projects. There must be
revenue recognized as soon as the investment decision has been put in place regardless of when
the actual money is received. As the alternatives are chosen, it is believed that the company will
continue to exist and be able to meet its objectives as planned, and not just a decision for a time.
The proceeding section of this report outlines the advantages and disadvantages of each strategy
to guide decision makers solve the contradictory phenomenon depending on individual
personalities.
NPV and IRR Analysis
While both NPV and IRR methods are useful in determining which project is best to do,
they both have advantages and disadvantage, and they end up giving conflicting results. The two
methods provide different aspects related to projects. The solutions brought about by the
techniques need further critical evaluation to arrive at a conclusion. NPV and IRR are usually
used by managers and entrepreneurs in decision making. However, the contradictory results
offered present arguments regarding the accuracy of the method in guiding decision makers.

PROJECT DEVELOPMENTS AND OPTIMIZATION 9
Employing the two methods in decision making without considering the operations, goals and
objectives of the company is misleading. Linking the evaluation of the advantages and
disadvantages of the two methods to the mission and vision of Adidas Company is the key for
proper decision making.
Advantages of NPV
The most significant concept regarding the NPV technique is that it is based on the
ideology that expected future value of dollars is greater than the current value of the dollars
situated in the bank. Estimated Cash flow in the forthcoming ages is discounted down to the
current value while designing a plan. The NPV strategy yields a dollar amount that denotes the
total amount of value likely to be generated in the company by the project. Business owners are
able to identify the total individual value generated by the project. Therefore, the criterion offers
a basement for the evaluation process.
Disadvantages of NPV
The NPV strategy cannot be used in comparing schemes with contrary investment
amounts. A project might have been unsuccessful as a result of underutilization of the available
resources thus misleading the entire interpretation due to inadequate capital investment. A
superior scheme that necessitates more capital should possess an advanced NPV, but the
ideology does not that the project is more profitable compared to small scale projects. Often, the
organization has other qualitative parameters to contemplate. The vital issue based on the use of
NPV is that it entails conjecturing about future cash flows and approximating the firm’s cost of
capital.
Advantages of IRR

PROJECT DEVELOPMENTS AND OPTIMIZATION 10
IRR considers the value of both money and time. The first and the most fundamental
thing regarding IRR is the ability to account for the money and time value while performing the
analysis of the project. Consideration of the time and money factor is an absent concept in the
ARR. Additionally, the technology exhibits straightforwardness. The most luring idea about this
technique is that it is straightforward to deduce after the IRR is deliberated. It is tranquil to
visualize among the management panel, and that is why the method is favored until they come
across confident infrequent circumstances such as mutually fashionable schemes.
Project optimization
As already indicated in the introduction part, project optimization refers to the adjustment
of the business analysis variable with the aim of making business operations more effective.
Often, project optimization entails adjustment of variables to meet the moving targets. Usually,
after the project is selected real-life factors come in place to display the issues that were not
addressed during the planning process. For any project to be successful, there is a need to find
the best possible combination of factors and settings in decision making. Not always should the
issues develop for project optimization to occur in an organization. The operations in the project
can be optimized to provide the best outcomes while at the higher level. For successful project
optimization to occur, A SWOT analysis needs to be done across all the levels of the work
breakdown structure (WBS). Usually, SWOT analysis identifies the strengths, threats,
opportunities and weaknesses of the project in the company. The study of the weaknesses
identifies areas that require optimization in the project. WBS, on the other hand, tries to break
down a big project into smaller departments that can be easily managed by groups or individuals
(Christensen, 2017). Furthermore, WBS outlines all the operations in the project.

PROJECT DEVELOPMENTS AND OPTIMIZATION 11
Following this report, the figure below provides an example of the work break down
representation.
Critical Analysis
Following the cost estimations and the IRR value, project A is preferred to project B. the
fact remains that project B is cost in terms of both capital and time. Therefore, we prefer a
project that is low costy (A). Additionally, project A has a higher IRR value meaning that the
project has higher returns to the organization compared to the project B. Following the results
presented by the two approached its evident that under normal circumstances a project with the
lowest total cost is likely to present the highest rate of returns. therefore, this research has been
successful in displaying the reliability and effectiveness of IRR and NPV in project development.
Project Development
and Optimization
Introduction Available
project
Optimization Recommendation Conclusion
Estimate Cash flows Conclusion on results Discussion on the
results
NPV and IRR

PROJECT DEVELOPMENTS AND OPTIMIZATION 12
Recommendation
According to the Fundamentals of Corporate Finance Standard Edition, suggest a shilling
is worth more than a shilling tomorrow and thus proper planning should be put in place to avoid
wastages. Estimating cash flows for the sake of determining the best decision is fundamental.
However, the two methods used in the calculation of the cash flows provide contradictory
results. Different methodologies used gives different results and assumptions hence making the
choice of what best fits the firm difficult. The two methods used in the calculation address
different ideologies that are fundamental to the evaluation process for decision making.
Therefore, the concept invites more evaluation and analysis to determine the best approach to
partake. Following the discussion above, the advantages associated with IRR are more than the
disadvantages.
Additionally, following the fact that Adidas Company is short-term goal oriented, there is
a need to consider the time factor. Furthermore, the technology takes into account the money
factor which is in line with the company's goals of enhancing profitability and increasing the
revenue generated. However, the choice of the technology required depends solemnly on the
objectives and goals set by the company.
Conclusion
It is conclusive that, failure to plan results to project catastrophe whereas noble planning
leads to efficacious schemes. Clear definition of project in the planning activity, and the creation
of an attainable timeframe, one is more likely to prosper in addressing the project objectives. The
ideology of proper planning echoes with simplicity yet so many venture directors blast the

PROJECT DEVELOPMENTS AND OPTIMIZATION 13
planning session. The challenges arise from external pressures and other individual assumptions.
Proper evaluation is necessary for choosing the best alternatives in decision making.
References
CFI (2018). What is the Cash Flow Statement? Retrieved from:
https://corporatefinanceinstitute.com/resources/knowledge/accounting/cash-flow-
statement%E2%80%8B/
Chris B. Murphy (2018). What is Cash Flow Statement? Retrieved from:
https://www.investopedia.com/investing/what-is-a-cash-flow-statement/
CISI (2018). What is Financial Planning? https://www.financialplanning.org.uk/wayfinder/what-
financial-planning
Emily Christensen (2017). How to Create a Work Breakdown Structure and Why You Should?
Retrieved from: https://www.lucidchart.com/blog/how-to-create-a-work-breakdown-
structure-and-why-you-should
Hyoung J. Park and Juliann Chen (2014). A Cost- Driving Design Optimization Framework.
Retrieved from: http://papers.cumincad.org/data/works/att/caadria2014_522.content.pdf