Financial Management Report: Evaluating Powerboat Projects for PENTAG

This financial management report assesses two powerboat projects, Q-Powerboat and S-Powerboat, for the company PENTAG. The report evaluates the projects based on quantitative aspects like net present value (NPV), internal rate of return (IRR), payback period, and discounted payback period, using cash flow statements and considering different discount rates. Qualitative aspects, including environmental impact and market risks, are also examined. The analysis reveals that while both projects are viable, Q-Powerboat is recommended due to its better performance under changing market conditions and lower environmental impact, leading to a higher NPV and a more favorable discounted payback period. The report concludes with a detailed comparison, justifying the recommendation of the Q-Powerboat project for PENTAG's expansion and new business line.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary
The concerned report is associated in order to give out knowledge and understanding to the CFO
of “PENTAG” company regarding the project that is ideal for them to undertake in order to
expand and develop their business and thereby initiate a new line of business in the Powerboat
production. An excel sheet has been constructed with the help of which cash flow statement that
has been constructed has been able to realise the net present value of each of the two projects and
thereafter come to the decision with respect to which of the projects is perfectly suitable for the
company. The outcome that has been attained has recommended that project “Q-Powerboat” is
ideal for “PENTAG” Company.

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Table of Contents
Introduction......................................................................................................................................3
Findings...........................................................................................................................................3
Quantitative Aspects....................................................................................................................4
Qualitative Aspects......................................................................................................................6
Recommendations and Justifications...............................................................................................7
Detail Comparison and Further Recommendation..........................................................................7
Conclusion.......................................................................................................................................7
Bibliography....................................................................................................................................9
Appendix........................................................................................................................................11

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Introduction
The concerned report is related to have knowledge about the boats that are produced by
“PENTAG” Company. The company has constructed the plan of producing powerboats, which
would be environment friendly in nature in order to reduce the pollution level in the
environment. This is seen to be a niche market and therefore effective level of development and
researches would create much better and advanced products. The firm has decided to take more
investments from the market in order to start producing the new products and hence new and
improved plants and machineries are in demand and additional cost of transaction would be
levied. “PENTAG” demands for investment in the initial stock and hence the firm has decided to
finance the new project by issuing 10% debentures of $10 million and the additional money
would be collected from the equity. In this scenario, it is essential for the company to gain an
understanding of the project that stays fit and thereafter construct steps and plans with the help of
which they would be able to improve their operational activities. The company has
recommended two projects and they are manufacturing of “Q-Powerboat” and manufacturing of
“S-Powerboat” and in order to understand the one that is ideal for the company, an evaluation of
the concerned two projects has been initiated and thereby understand, which of the projects give
out better return on investment. A comparative analysis of the statement of the cash flows has
been effective enough in order to have a clear idea of the approach of capital budgeting that can
be undertaken in order to assess the two concerned projects.
Findings
This section of the report addressees the outcome of the overall research that has been
gathered after the examination of the constructed cash flow statement and the outcome that is

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created are in line with the qualitative and the quantitative elements that are associated with the
two projects.
Quantitative Aspects
The quantitative aspect refers to the figures and amounts that have been constructed by
creating the cash flow statement and accordingly the results that have been obtained will be
explained in an effective manner. The initial investment of $21,500,000 has been found for “Q-
Powerboat” and the plant and equipment cost has been $20,000,000. The transportation and
installation cost has been $800,000 whereas the stock investment has been $500,000 and the
additional fund from the debtor has been $380,000. In this manner, a cash flow statement for the
coming six years has been constructed for “Q-Powerboat”. The net operating cash flow for this
project has been found to be $8,973,000 after the end of year one and thereafter the results have
shown that there has been a fall in the net operating cash flow in the coming years and at the end
of the sixth year the figure has been $5,823,000. “Q-Powerboat” project has its net salvage value
to be $2,800,000. The initial rate of discount for “Q-Powerboat” is 20% after which assessment
has been made with respect to the discovery of the cumulative discounted cash flow value. The
net cash flow for “Q-Powerboat” project has been $8,973,000 in the first year and then this value
has diminished but the in the last year the value has been $8,623,000, which has been relatively
higher than the previous years. The cash flow statement has been able to address the internal rate
of return, net present value, payback period and discounted payback period. The values for net
present value are seen to be $4,276,443, while the internal rate of return has been 29.67%. The
payback period has been 2.54 and on the other hand 4.135 has been the discounted payback
period.

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Now, while considering “S-Powerboat” it is observed that the initial investment has been
same and the value has been $21,500,000 and this money has been utilised in the purchase of
plant and machinery worth $20,000,000, cost of installation to be $800,000 and the stock in
investment to be $500,000. The future cash flow of the project has been rising from the initial
year and at the end of the sixth year the figure amounted to $11,100,000. In the first year, the net
cash flow has been $6, 40,000 and this figure increased to $11,100,000 in the last year. The
attainment of these values have led to the discovery of net present value and the same has been
$4,288,489 at an internal rate of return at 28.42%, 2.97 has been the payback period and 4.618
has been the discounted payback period at a discount rate of 20%. The outcome at 20%
discounted rate has explained that both the projects are favourable however; “S-Powerboat” has
a slight edge over “Q-Powerboat”.
On the other hand, when the discount rate is increased from 20% to 25%, there has been a
massive change in the values of the two projects. As the discount rate has changed, there has
been no effect on the net cash flow for the two projects but because the discount rate has changed
it is seen that there has been fall in the net present value and the other rates of returns as well. For
“Q-Powerboat”, the net present value has accounted to $1,794,528. In the same manner, the
internal rate of return has been 29.47% and the payback period has the same percentage as the
discount rate of 20% and the percentage has been 2.54%. The change in the discounted payback
period has been 5.008.
By assessing the amended cash flow statement of “S-Powerboat” the changes have only
been observed in the net present value and discounted payback period. The values that have been
obtained have indicated the fact that the net present value has been $1,504,466 and the
discounted payback period has been 5.338 for “S-Powerboat”.

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These have been the quantitative aspects that has been discovered for the two projects
and the results indicate that alterations in the discounted rate has led to the effects on the net
present value and the impact has been higher for “S-Powerboat” than “S-Powerboat” as the
figures indicate that the net present value decline margin has been higher for “S-Powerboat”. The
changes have even affected the discounted payback period and the discounted payback period
has been higher for “S-Powerboat” than “Q-Powerboat” at 25% discount rate. In this manner, it
is seen that “Q-Powerboat” has better potential to handle market changes in accordance to “S-
Powerboat” and therefore “Q-Powerboat” is a more favourable project for “PENTAG”.
Qualitative Aspects
The two projects have related qualitative aspects as well and this is seen with the
environmental effects the projects would have. The two projects are concerned with the
production of small powerboats and therefore spillage of oil and emission of carbon are the
impact the boats can have on the marine ecosystem. It is due to this fact that the company has
been looking to manufacture eco-friendly products. The qualitative aspects is related to the
quantitative aspects as it is seen that decline in the net present value would have an impact on the
market share of the company, level of investment and the brand image. By assessing the risks
and the issues that are qualitative in nature one can come to a conclusion that “S-Powerboat” is
more risky project than “Q-Powerboat” as the carbon emission would be lower for “Q-
Powerboat” and the change in the discount rate would have lesser impact on the net present value
of “Q-Powerboat”. In the same manner, the discounted payback period for “Q-Powerboat” has
been lower than “S-Powerboat” and therefore “Q-Powerboat” is should be the selected projected
for the organization.

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Recommendations and Justifications
The analysis of the aspects that have been discussed earlier in this report has been helpful
in creating an understanding that “PENTAG” has the liberty to take up one of the two projects
for their expansion programme. The outcome of the qualitative and quantitative aspects have led
to the fact that “Q-Powerboat” has better net present value and discounted payback period in
accordance to the changing market scenario in comparison to “S-Powerboat” and “Q-Powerboat”
with its effective net present value would attract additional investments in the project and thereby
would increase the market share and the revenue for the company. It is seen that the eco-
friendliness of the “Q-Powerboat” has been higher as the pollution level is seen to be lower and
therefore by looking into this aspect, one can come to conclusion that “Q-Powerboat” is project
that can be taken up by “PENTAG”.
Detail Comparison and Further Recommendation
A comparison in an explicit manner has even been initiated and the results reveal that
when the discount rate is fixed, the net present value has been better for “S-Powerboat” but the
scenario changes when there is a change in the discount rate. In this scenario, “Q-Powerboat” has
been found to be much better. The analysis of both the projects have highlighted that both the
projects are similar in nature but changes in the market rates and the qualitative aspects have
determined that “Q-Powerboat” is ideally suitable for “PENTAG”. Furthermore, 20.17% is the
cross over percentage for the two projects and therefore “PENTAG” should move ahead with
“Q-Powerboat” project.
Conclusion
The overall report has therefore explained the various problems that have been faced by
“PENTAG” as they were having issues understanding which of the two projects would be ideal

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for them to expand their business and start a new business line. However, the assessment of the
qualitative and quantitative aspects associated with the two projects have indicated that “Q-
Powerboat” is a much better project to initiate for “Q-Powerboat” than “S-Powerboat” in order to
maintain competitive edge and attain the mission and vision statement of “PENTAG”.

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Bibliography
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operating profitability in the cross section of stock returns. Journal of Financial
Economics, 121(1), pp.28-45.
Campbell, J.L., 2015. The fair value of cash flow hedges, future profitability, and stock
returns. Contemporary Accounting Research, 32(1), pp.243-279.
Collins, D.W., Hribar, P. and Tian, X.S., 2014. Cash flow asymmetry: Causes and implications
for conditional conservatism research. Journal of Accounting and Economics, 58(2-3), pp.173-
200.
Epstein, M.J. and Yuthas, K., 2017. Cash flow training and improved microfinance
outcomes. Journal of International Development, 29(1), pp.106-116.
Gupta, J., Wilson, N., Gregoriou, A. and Healy, J., 2014. The value of operating cash flow in
modelling credit risk for SMEs. Applied Financial Economics, 24(9), pp.649-660.
Hartman, J.M., Cornwall, J.R. and Vang, D.O., 2015. Day-to-Day Cash Flow Management and
Forecasting. In Entrepreneurial Financial Management (pp. 150-164). Routledge.
Jones, S., 2016. A Cash Flow Based Model of Corporate Bankruptcy in Australia. Journal of
Applied Management Accounting Research, 14(1), p.23.

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Lewellen, J. and Lewellen, K., 2016. Investment and cash flow: New evidence. Journal of
Financial and Quantitative Analysis, 51(4), pp.1135-1164.
Miao, B., Teoh, S.H. and Zhu, Z., 2016. Limited attention, statement of cash flow disclosure, and
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Appendix
Discount Rate at 20%
Q-Powerboat:
Year
Particulars 0 1 2 3 4 5 6
Initial Investment:
Cost of Plant
-
$20,000
,000
Transportation &
Installation Cost
-
$800,00
0
Investment in Stock
-
$500,00
0
Increase of Debtors
-
$380,00
0
Increase of Creditors
$180,00
0
Total Initial
Investment
-
$21,500
,000
Operating Cash Flows:
Sales Volume 650 600 550 500 450 400
Selling Price per unit $30,000
$30,00
0
$30,00
0
$30,00
0
$30,00
0
$30,00
0
Sales Revenue
$19,500
,000
$18,00
0,000
$16,50
0,000
$15,00
0,000
$13,50
0,000
$12,00
0,000
Increase in Sales of
Powerboat Parts
$500,00
0
$500,0
00
$500,0
00
$500,0
00
$500,0
00
$500,0
00
Variable Cost of
Production
-
$7,800,
000
-
$7,200,
000
-
$6,600,
000
-
$6,000,
000
-
$5,400,
000
-
$4,800,
000
Fixed Factory Overhead
-
$200,00
0
-
$200,0
00
-
$200,0
00
-
$200,0
00
-
$200,0
00
-
$200,0
00
Cost of Production for
Parts
-
$200,00
-
$200,0
-
$200,0
-
$200,0
-
$200,0
-
$200,0