Financial Analysis and Capital Budgeting for Tissue Co. Projects A & B

This report presents a financial analysis of two projects, A and B, undertaken by Tissue Co., a tissue paper manufacturer. The report includes profit and loss statements, cash flow statements, and capital budgeting techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), Average Rate of Return (ARR), Payback Period, and Profitability Index (PI) to evaluate the financial viability of each project. Project A involves manufacturing fragrance toilet paper, while Project B focuses on producing thick, soft, and water-disposable paper. The report calculates discount rates, NPV, IRR, payback periods, ARR, and PI for each project. The analysis provides insights into the profitability and financial performance of each project, aiding managers in making informed investment decisions. The analysis concludes with recommendations for future growth and investment strategies based on the financial metrics calculated.

Finance for Managers

TABLE OF CONTENTS
Project overview and description...........................................................................................5
Profit and loss statement and Cash flow statement................................................................5
Discount rate...........................................................................................................................7
Capital budgeting analysis......................................................................................................8
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

Index Of Tables
Table 1: Profit and loss statement and cash flow statement of Tissue co. for Project A.................6
Table 2: Profit and loss statement and cash flow statement of Tissue co. for Project B.................6
Table 3: Discount rate for Tissue co. Project A...............................................................................8
Table 4: Discount rate for Tissue co. Project B...............................................................................8
Table 5: NPV for Tissue Co. Project A...........................................................................................9
Table 6: NPV for Tissue co. Project B............................................................................................9
Table 7: IRR Project A..................................................................................................................10
Table 8: IRR Project B...................................................................................................................10
Table 9: Payback Period Project A................................................................................................11
Table 10: Payback Period Project B..............................................................................................11
Table 11: ARR of Tissue Co. Project A........................................................................................12
Table 12: ARR of Tissue Co. Project B.........................................................................................13
Table 13: Profitability Index of Tissue Co. Project A...................................................................13
Table 14: Profitability Index of Tissue Co. Project B...................................................................14

EXECUTIVE SUMMARY
To gather the adequate amount of finance of funds in order to have successful business
operations in the coming time there is need to make the appropriate planning for making any
investments in operational aspects of the business. Therefore, with the help of such investments
the company and managerial professional must find profitability and the adequate results. Thus,
in the present assessment there will be discussion based on the managers in Tissue Co. in the
Project A and Project B. Hence, it can be said that the present report will be based on measuring
various calculations such as Profit and loss as well as cash flow statements of both the projects.
Thee report will also shed some lights over the various capital budgeting techniques such as IRR,
NPV, ARR, PI and Payback period. Hence, with the help of such analysis the managers will be
beneficial in making appropriate decision which in turn reflects the profitability of which project
to be carry forward.

Project overview and description
Tissue Co. is a private business which mainly operates in manufacturing and selling of
Toilet tissue paper. However, company decided to plan the two project which are under the
execution of two managers such as Project A and Project B. Thus, both the projects have various
expenditures of income gains which in turn will be estimated and calculated. Therefore, it will
reflect the fruitful plan which are needed to be acquired by industry for future growth.
Project A:
In consideration with the project A, on which the managers has presented idea of
manufacturing the Fragrance Toilet Paper in the company Thus, in accordance with such idea,
business has to install a new machinery which produces fragrance toilet paper or in spite of
installing a new machinery, they could make modification in the previously existing machinery.
Hence, this idea is taken by the manager to improve selling as well as to present unique product
in market (Picker and et.al., 2016). There are no any other demand in this project as they just
need the new machinery or required a modification in the machinery which in turn produces the
fragrant toilet paper. However, in consideration with such investments the company will require
new machinery for the cost of 1.5 millions which the useful life of 5 years. Thus, it does not have
any resale value, its is a complete scrape after completion of such period. Hence, the seller of
such machinery has charged 1 million as the cost of machinery and the company will pay 8% of
the interest in return.
Project B:
In accordance with the project B the managers has proposed an innovative idea which
says that, company must plan to make the thick and soft surface paper which will easily
disposable if it is soaked in water. However, there will be requirement of various research and
developments in this context. Thus, it will be helpful for the business in making the adequate
plan as well as gaining the fruitful returns from such investments. However, in accordance with
such operations there will be need of purchasing a new machinery which will cost for 0.5 million
on the five year estimated life and no resale value as it is fully scraped after completion of such
period.

Profit and loss statement and Cash flow statement
Project A
Table 1: Profit and loss statement and cash flow statement of Tissue co. for Project A
Profit and loss statement
PROJECT A 1 Year 2 Year 3 Year 4 Year 5 Year
PARTICULARS
EBIT 300000 400000 500000 400000 300000
Interest expenses 40000 40000 40000 40000 40000
Interest over sell of machinery 80000 80000 80000 80000 80000
Product testing cost 30000
depreciation value 300000 300000 300000 300000 300000
Profit before tax -150000 280000 380000 280000 180000
Tax -45000 84000 114000 84000 54000
Profit after tax -105000 196000 266000 196000 126000
+Depreciation 300000 300000 300000 300000 300000
Profit after tax and depreciation 195000 496000 566000 496000 426000
Interpretation: In accordance with the above listed table it can be interpreted that the
Project A is reflecting the profitable gains in year as it can be said that the investment will be
fruitful for the company. Thus, in the first year they have the EBIT for 300000 and the interest
will be paid by managers in the consideration with the buying the new machinery for 80000.
Thus, the depreciation valuation of machinery is shown in then following working note.
Therefore, the depreciation will be payable for all the 5 years at 300000 on the straight line basis.
The corporate tax has been paid at the rate of 30% over the profit gained in each year.Hence, the
first year the profit after tax of this project reflect the negative balance such as -105000 but the
cash flow reflects positive outcome such as 195000. Thus, the project is fruitful as it reflects the
positive outcomes in all the years.
Project B
Table 2: Profit and loss statement and cash flow statement of Tissue co. for Project B
Profit and loss statement 1 Year 2 Year 3 Year 4 Year 5 Year

PROJECT B
PARTICULARS
EBIT 80000 80000 500000 900000 200000
Interest expenses 40000 40000 40000 40000 40000
Interest over sell of machinery 80000 80000 80000 80000 80000
Product testing cost 100000
Research and development cost 500000
depreciation value 200000 200000 200000 200000 200000
Profit before tax -840000 -240000 180000 580000 -120000
Tax -252000 -72000 54000 174000 -36000
Profit after tax -588000 -168000 126000 406000 -84000
+Depreciation 200000 200000 200000 200000 200000
Profit after tax and depreciation -388000 32000 326000 606000 116000
Interpretation: In consideration with such project the profit and loss and the cash flow
statements of such project is reflected in the above listed table which in turn helps in presenting
fruitfulness of such project investments in the business. Hence, in accordance with the initial
investments of the company the EBIT for the first year is for 80000, the product testing expenses
will be reduced in accordance with the trial of such new machinery in the first year is for 1
million. There has been payments of the research and development for 500000 and the
depreciation measurement is listed in the below listed working note which in turn reflects that
such 200000 of depreciation will be paid each year on the basis of straight line method. Thus,
there has been payment for 30% of the corporate tax in year. In accordance with the cash flow of
the company first year reflects the negative balance for -388000 and for the following years it
presents the favourable outcomes.
Working note:
Depreciation measurements (Straight Line depreciation, 2017)
PARTICULARS PROJECT A PROJECT B
cost of machinery 1500000 1000000
life of machinery 5 5

depreciation value 300000 200000
Discount rate
These are the rates which are charged by the commercial banks over the loans taken by
any individual or corporation in context with making any investments. Thus, this are known as
the discount rates (Madineh and et.al., 2017). However, Tissue Co. managers will go to plan to
make the two investments projects in the which are base of the different piece of operations such
as Project A lies with manufacturing the fragrance toilet paper while Project B lies with
producing the thick and soft based paper. However, there has been huge difference in the
requirements of the investment as well as the loan taken by managers for completion of such
operations.
Project A
Table 3: Discount rate for Tissue co. Project A
PARTICULARS 1 Year 2 Year 3 Year 4 Year 5 Year
cash flows of the years 195000 496000 566000 496000 426000
Rate of return 0.93 0.86 0.79 0.74 0.68
Discounted CF 210600.0 578534.4 712997.0 674802.5 625933.8
Project B
Table 4: Discount rate for Tissue co. Project B
PARTICULARS 1 Year 2 Year 3 Year 4 Year 5 Year
cash flows of the years -388000 32000 326000 606000 116000
Rate of return 0.93 0.86 0.79 0.74 0.68
Discounted CF -419040.0 37324.8 410666.1 824456.3 170442.1
Interpretation: By considering the above listed table 3 there has been measurements
which are relevant with the discount rate of such projects. Thus, in Project A, the managers has
taken loan for 1 million and therefore have the interest rate of 8% which in turn has to be paid by
them for in all the years as 0.93, 0.86, 0.79, 0.74, 0.68 respectively. Hence, there has been
calculation which were made over the discounted Cash flow such as 210600 for the first year and

for the rest of the period it is 578534.4 and so on. Further, in consideration with the table 4 which
reflect the discounted outcomes for the project b such as -419040 in the first year and fro the
following years these are 37324.8, 410666.1, 824456.3 and 170442.1 respectively. Moreover, it
can be said that the Project A will be beneficial as it reflects positive outcomes all the years.
Capital budgeting analysis
NPV:
In terms with analysing the present value over the investments made by organisation in
each projects which in turn reflect the fruitful plan results and make the directors or managers
able to determine the profitable gains from which project (Chandel and et.al., 2017). Thus, the
calculation for NPV determines differences between the present value of each cash inflows and
outflows which can be understand by the following formula such as:
Project A
Table 5: NPV for Tissue Co. Project A
PARTICULARS
Years CF Discount factors NPV
Cumulative
NPV
1 195000 0.93
180555.5
6
2 496000 0.86
425240.0
5 605795.61
3 566000 0.79
449309.0
5 1055104.66
4 496000 0.74
364574.8
1 1419679.47
5 426000 0.68
289928.4
4 1709607.91
Total 1709607.

91
Project B
Table 6: NPV for Tissue co. Project B
PARTICULARS
Years CF
Discount
factor NPV
Cumulative
NPV
1 -388000 0.93
-
359259.3
2 32000 0.86 27434.8 -331824.42
3 326000 0.79 258789.3 -73035.11
4 606000 0.74 445428.1 372392.98
5 116000 0.68 78947.7 451340.64
Total
451340.6
4
Interpretation: In accordance with the Net preset Value which are presented for the
bothe the projects in the project A and Project vB for the 5 years of investment thus have the
huge variations. However, in accordance with the project A, the NPV was calculated as
1709607.91 and for Project B it is 451340.64 respectively. Therefore, it can be said that the
favourable NPV which is adequate for the success of such operational plans will be fruitful in
terms of Project A. However, it can be said that project A will be beneficial for the managers in
having appropriate present value.
IRR:
In terms of measuring the profitability of investment there is need to analyse the internal
rate of return which in turn reflects the fruitful solution to the business operations (Mukherjee, Al
Rahahleh and Lane, 2016). However, the IRR is also measured as the same formula of the NPV
but in the proportionate manner.
Project A

Table 7: IRR Project A
Source: (Internal Rate of Return (IRR), 2017)
PARTICULARS
Years CF Discount factors NPV
Cumulative
NPV
1 195000 0.93 180556
2 496000 0.86 425240 605795.61
3 566000 0.79 449309 1055104.66
4 496000 0.74 364575 1419679.47
5 426000 0.68 289928 1709607.91
Total
1709607.
91
IRR 94.69%
Project B
Table 8: IRR Project B
PARTICULARS
Year CF
Discount
factor NPV
Cumulative
NPV
1 -388000 0.93
-
359259.3
2 32000 0.86 27434.8 -331824.42
3 326000 0.79 258789.3 -73035.11
4 606000 0.74 445428.1 372392.98
5 116000 0.68 78947.7 451340.64
Total
451340.6
4
IRR 36.15%
Interpretation: In consideration with the above listed tables such as 7 and 8 which
reflects that Project A will bring the Profitable returns for the proportionate of 94.69% and in the

Project B it reflects the profitable return over the investment made by organisation such as
36.15%. Hence, it can be recommended that firm must apply Project A in operations which in
turn helps in enhancing the profit gathering as well as facilitate the adequate gains.
Payback Period:
It is the measurement which helps in analysing the requirements of the time duration in
completion of any task on the basis of investment made by company in each projects (Malenko,
2016). Thus, it can be said that, less time taken by any project in making the same profitable gain
as per invested before than it will be fruitful project for the business and thus, the managers must
choose to operate such business operations.
Project A
Table 9: Payback Period Project A
PARTICULARS
Years CF Discount factors NPV
Cumulative
NPV
1 195000 0.93 180556
2 496000 0.86 425240 605795.61
3 566000 0.79 449309 1055104.66
4 496000 0.74 364575 1419679.47
5 426000 0.68 289928 1709607.91
Total
1709607.
91
IRR
9.468597
643
Payback period 0.11
Project B
Table 10: Payback Period Project B
PARTICULARS
Year CF Discount NPV Cumulative

factor NPV
1 -388000 0.93
-
359259.3
2 32000 0.86 27434.8 -331824.42
3 326000 0.79 258789.3 -73035.11
4 606000 0.74 445428.1 372392.98
5 116000 0.68 78947.7 451340.64
Total
451340.6
4
IRR 36.15%
Payback period -0.80
Interpretation: In accordance with the table such as 9 and 10 for Project A and Project
B. Thus, Project A reflects the payback will be within 2 years such 1.1 years and Project B
reflects that the payback will be in less than a year. Thus, in tins regards the Project B will be
beneficial for the company.
ARR:
In accordance with such capital budgeting technique it does not relate with the time value
of money (Turner, 2017). There for it helps in measuring the profitability of the project on the
basis of net profit as well as the investment made in such period. However, it can be relates to
the proportionate outcomes of such gains.
Project A
Table 11: ARR of Tissue Co. Project A
Source: (What is ARR?, 2017)
PARTICULARS Net profit Investments
1 Year 195000 300000
2 Year 496000 400000
3 Year 566000 500000
4 Year 496000 400000
5 Year 426000 300000

Average 435800 380000
ARR 1.1468421053
ARR % 11.47%
Project B
Table 12: ARR of Tissue Co. Project B
PARTICULARS Net profit Investments
1 Year -388000 80000
2 Year 32000 80000
3 Year 326000 500000
4 Year 606000 900000
5 Year 116000 200000
Average 138400 352000
ARR 0.3931818182
ARR % 3.93%
Interpretation: As per the above listed tables such as 11 and 12 which reflects the ARR
of both the project. Thus Project A is having 11.47% of the profitable return. Therefore, project
B reflects only 3.93% of the profitability from such investments. Hence, it can be said that
Project will be beneficial for company as it have the most adequate ARR.
Profitability Index:
It helps in ranking the project in accordance with the profitable index of them over the
years which are based on present value of the cash flow and the initial investments over the
projects (Graham and Sathye, 2017). Hence, it can be understand by determining such below
listed formula as:
Project A

Table 13: Profitability Index of Tissue Co. Project A
Years Cash Flow Future CF (pv)
1 195000 180555.56
2 496000 425240.05
3 566000 449309.05
4 496000 364574.81
5 426000 289928.44
Total 1709607.91
Initial Investment 300000
Profitability Index 5.70
Project B
Table 14: Profitability Index of Tissue Co. Project B
Years Cash Flow Future CF (pv)
1 -388000 -359259.26
2 32000 27434.84
3 326000 258789.31
4 606000 445428.09
5 116000 78947.65
Total 451340.64
Initial Investment 80000
Profitability Index 5.64
Interpretation: In accordance with the above listed tables such as table 13 and 14 which
do not have that must variation as other capital budgeting tools have. Hence, such segment the
profitable project will be Project A as it reflect the index for 5.70 while Project B presents it as
5.64