Cost Management and Analysis: Financial Scenario Evaluation Report

This report provides a detailed analysis of cost management and financial performance, focusing on four different scenarios. It examines key financial metrics such as Earnings Before Interest and Tax (EBIT), Capital Expenditure (Capex), Net Present Value (NPV), and Internal Rate of Return (IRR) to evaluate the financial health of projects. The analysis compares the scenarios, highlighting trends in EBIT and cash flow, and the impact of NPV and IRR values on project selection. The report also identifies problems in specific scenarios, such as negative NPV and discusses future trends and the importance of selecting the correct project for profitability. The conclusion summarizes the findings and emphasizes the significance of cost management in making sound financial decisions.

Running head: COST MANAGEMENT AND ANALYSIS
Cost Management and Analysis
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Author’s Note

1COST MANAGEMENT AND ANALYSIS
Table of Contents
Analysis of Information.................................................................................................................................2
Problems and Suggestions.............................................................................................................................3
Future Trends and Impacts.............................................................................................................................3
Conclusion.....................................................................................................................................................4
References......................................................................................................................................................5

2COST MANAGEMENT AND ANALYSIS
Analysis of Information
In the business organizations, financial analysis is one of the major parts in order to measure the
financial performance of the companies. In addition, with the help of financial analysis, the board of
directors along with the major stakeholders of the companies can understand the overall financial health
of the companies. In order to analyse the financial condition of the companies, the financial managers use
to observe some of the major financial parameters; they are earning before Interest and Tax (EBIT),
Capital Expenditure (Capex), Net Present Value (NPV), Internal Rate of Return (IRR) and others.
As per the provided case, it can be seen that there are four scenarios. Each scenario has all the
information about EBIT, Capex, NPV and IRR of the projects. Thus, for this analysis, it is required to
discuss some of the major terminologies for the analysis. First, EBIT is one of the major concepts for the
business organizations. EBIT refers to a particular measure of the performance of the company’s profit
that includes all the expenses except interest and taxation expenses (Barta, Kleiner and Neumann 2012).
More specifically, it is considered as the difference between the operating revenues and operating
expenses of the companies. Another major aspect is the concept of Capital Expenditure. Capital
expenditures refer to those business expenditures that are occurred for the acquisition and maintenance of
the fixed assets of the companies such as land, building, machineries and others. The concept of NPV is
used for the analysis of the profitability of particular projects or investments (Rich and Rose 2014). More
specifically, NPV is considered as the difference between the present value of cash inflows and the
present value of cash outflows. The concept of IRR is used for the measurement of the profitability of the
potential investments of the companies (Bas 2013).
As per the first scenario, it can be seen that there is an increasing trend in the EBIT of this
particular project. The same increasing trend can be seen in case of EBIT excluding depreciation and after
tax cash. In this scenario, the rate of NPV and IRR for this project is 11% and 28.7% respectively. In case
of the second scenario, it can be seen that EBIT of the project has an increasing trend over the years. The

3COST MANAGEMENT AND ANALYSIS
same increasing trend can be seen in case of EBIT excluding depreciation and after tax cash. Capital
expenditure can be seen in the financial year of 2022. In this scenario, the rate of NPV and IRR of this
project is 11% and 35.8% respectively. The NPV of first and second scenario is 55.5 million and 77.9
million. However, the third and fourth scenario is different from the first and second scenario. In case of
the third scenario, it can be seen that the NPV of the project of zero. This has happened as the rate of
NPV and IRR is same that is 11%. In the fourth year, decrease in after tax cash flow can be noticed. In
case of the fourth scenario, one of the major factors is that the NPV of this project is in negative and the
rate of IRR (0.8%) is less than the rate of NPV (11%). Negative NPV implies that the company will not
be able to recover the cost of the project during the project lifetime. On the other hand, fluctuations can be
seen in after tax cash flow of this particular project (Brigham and Houston 2012). For the selection of any
project or investment, the NPV and IRR of that particular project need to be higher compared to the other
projects or investments. Thus, based on the provided sensitivity analysis, it can be seen that both the NPV
and IRR of the project is higher than the other three projects. On the other hand, the amount of gross
profit is higher in this project than the other projects. Thus, Coles should select this project.
Problems and Suggestions
From the above analysis, it can be seen that there are some problems in the third and fourth
scenario. In case of the fourth scenario, it can be seen that the NPV of the project is negative. At the same
time, the rate of IRR is lower than the rate of NPV. In addition, fluctuations can be seen in after tax cash
flow. In the second scenario, it can be seen that the NPV is zero. For all these reasons, it is needed for the
company to reduce the project costs in different levels. Reduction of project costs in different level will
help the company to increase the amount of NPV for the projects.
Future Trends and Impacts
From the above analysis, it can be seen that the selection of correct project or investment will
have major impact on the operation of the company. In case the company selects the fourth project, the

4COST MANAGEMENT AND ANALYSIS
company will be profitable, as right investment will fetch the company with higher returns. In case the
company fails to choose the correct project, it will affect the profitability as well as return of the
company.
Conclusion
From the above discussion, it can be seen that there are four scenarios provided. Based on the
above analysis, it can be seen that there is a trend to increase in the EBIT and after tax cash flow in case
of the first and second scenario. However, in case of the fourth scenario, it can be seen that the NPV is
negative and the rate of IRR is less than the rate of NPV. From the sensitivity analysis, it can be seen that
in the fourth scenario, the amount of gross profit is more. In addition, the amount of NPV is higher than
all other projects along with the rate of IRR. The above discussion also shows the fact that the negative
amount of NPV in the fourth scenario is one of the major problems for the company. For this reason, the
company needs to cut the amount of costs from the various operations of the project to make the amount
of NPV positive.

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References
Barta, T., Kleiner, M. and Neumann, T., 2012. Is there a payoff from top-team diversity?. McKinsey
Quarterly, 12, pp.65-66.
Bas, E., 2013. A robust approach to the decision rules of NPV and IRR for simple projects. Applied
Mathematics and Computation, 219(11), pp.5901-5908.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.
Rich, S.P. and Rose, J.T., 2014. Re-examining an old question: Does the IRR method implicitly assume a
reinvestment rate?. Journal of Financial Education, pp.152-166.
Xiao, Z. and Xiao, Y., 2013. Security and privacy in cloud computing. IEEE Communications Surveys &
Tutorials, 15(2), pp.843-859.

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