Applied Finance Project Analysis: 7251AFE, Trimester 1, 2020, Griffith

This document presents a solved project for the 7251AFE Applied Finance course at Griffith University, focusing on corporate finance principles. The assignment comprises two tasks: the first task involves a comparative analysis of two investment projects, the Djakarta Project and the Gladstone Project, using Net Present Value (NPV) to determine feasibility, with a recommendation to the CFO. The second task centers on the Weighted Average Cost of Capital (WACC) and its applicability to a given scenario, alongside investment decisions. The solution includes WACC calculation, sensitivity analysis and considers various scenarios to determine the financial viability of a project. It provides recommendations based on financial metrics and market conditions, incorporating academic sources to support the analysis. The project demonstrates the application of financial modeling and decision-making in corporate finance, including the consideration of risk and return, and the evaluation of investment opportunities.

Running Head: CORPORATE FINANCE 1
CORPORATE FINANCE

CORPORATE FINANCE
Table of Contents
Task 1...............................................................................................................................................3
Task 2...............................................................................................................................................3
References........................................................................................................................................5

CORPORATE FINANCE
Task 1
As per the above analysis it can be stated that the second project, namely DJAKARTA
PROJECT against the GLADSTINE PROJECT, tends to be feasible as compared. This decision
is taken because the net present value of Gladstone project is $19788826, whereas that of
Djakarta Project is $119612504, which is greater than Gladstone project. The investment
working capital also reflects that, at the end of the 10th year, due to its recovery and cash inflows
from sale of land, leads to higher margins of the cash flows in comparison to Gladstone project.
The opportunity cost is not enough to cover the cash payback and hence, Djakarta Project is one
feasible amongst the two mutually exclusive projects. Also, despite the higher rate of the cost of
the capital at 17%, and along with the positive NPV reflects the project is feasible from the point
of view of the future sustainability. Hence, project Djakarta shall be recommended to CFO of
Griffin, Ms. Kristen Robertson (Gallo, 2016).
Task 2
WACC is a measure of the cost of the fund which is weighted by the proportion of the
debt and the equity prevailing in the business. It resembles the minimum return a company must
get from its business in order to pay back its dues and retain some profits as well and GCWC,
must not use the WACC based on the companies, as it is clearly evident from the company, the
key points that are not in favour of such decision. The cost of equity of both the companies is
fluctuating, the tax rate being different and the different weights of the capital structure suggest
that WACC cannot be based on companies. The appropriate discounting rate that must be used is
19.80% which has been calculated on the basis of the risk free rate of return and coupon rate
(Hopkinson, 2017).

CORPORATE FINANCE
At current stage GCWC must not invest in the project according to the base case, as the
net present tends to be negative. This implies that the negative net present value is not a good
sign and the company is not able to cover the initial costs. Further, after implementing the
forecasting techniques and scenario analysis it can be ascertained that if the company opts for the
best case scenario or if there is an increase of10% to 30% in the sales units, sales price, along
with the variable costs and fixed costs, the company can think of investing, as it would result in
positive Net present value.
Under the base case the net present value is -$478617, whereas if the sensitivity analysis
is performed and the enhancement by 20% has been applied, the net present value shifts to
$860603. This clearly indicates that due to the higher cost of capital, present value of the cash
flows is negative. Since the cost of capital cannot be changed, the changes are required to be
made in the units or prices (Hopkinson, 2017).
Hence, after the entire analysis it can be said that at present this case is not feasible but if
the units are increased, it might become a right choice.

CORPORATE FINANCE
References
Gallo, A. (2016). A refresher on internal rate of return. Harvard Business Review Digital
Articles, 2-4.
Hopkinson, M. (2017). Net Present value and risk modelling for projects. Routledge.