Managerial Finance Project: NPV Analysis of Investment Projects

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Managerial finance
1

Table of Contents
Introduction......................................................................................................................................3
Project 1...........................................................................................................................................4
(1) NPV calculation of canopy and topless............................................................................4
(2) NPV analysis of canopy and topless.................................................................................7
Project B..........................................................................................................................................8
(A) Calculation of NPV and project worth analysis....................................................................8
(B) Sensitivity analysis..............................................................................................................13
Conclusion.....................................................................................................................................20
References......................................................................................................................................21
2

Introduction
Managerial finance is a new concept that is made from a combination of management accounting
and corporate finance. Managerial financial is crucial for a company to create the value of the
investment; managerial accounting is basically focused on assessment rather than techniques.
The assessment process is more significant than providing tools and techniques from a company
perspective because through assessment process a company can better allocate their resources in
different units of business thus it's important for a company to utilize resources wisely. Capital
budgeting is a process of evolution in which a company evaluates expanses or investment of a
company. It’scrucial for a company to evaluate the return on investmentof their investment in the
company through which a company can maximize its wealth as well as shareholders wealth.
Capital budgeting is a process of measuring inflows and outflows of cash from the company
which is important from a budget estimation perspective. In this study of capital budgeting, the
net present value of two cars will be calculated and a brief analysis will be done on NPV of these
two cars after that NPV of a project will be calculated. A sensitive analysis will be calculated on
a given project in this study than after analysis will be briefly explained.
3

Project 1
(1) NPV calculation of canopy and topless:
NPV for Canopy
Cost 150,000
Rental Income 100,000
Operating Cost 20,000
Service Cost 10,000
Rate 50,000
Salvage Value 50,000
Year
Equipm
ent +
Salvage Income
Operating
Cost
Service
Cost
Net
Income
DCF @
12% P.V.
0
15
0,000 - - -
(1
50,000) 1.00
(
150,000)
4

1 - 100,000 20,000 - 80,000 0.89 71,429
2 - 100,000 20,000
1
0,000 70,000 0.80 55,804
3
5
0,000 100,000 20,000 - 130,000 0.71 92,531
NPV 69,764
5

NPV for Topless:
Cost
100,00
0
Rental Income
60,00
0
Operating Cost
10,00
0
Service Cost
15,00
0
Rate 10%
Salvage Value
25,00
0
Yea
r
Equipme
nt +
Salvage Income
Operatin
g Cost
Service
Cost
Net
Income
DCF @
10% P.V.
0
100,
000 - - -
(1
00,000) 1.00
(
100,000)
1
6

- 60,000 10,000 - 50,000 0.91 45,455
2 - 60,000 10,000 - 50,000 0.83 41,322
3 - 60,000 10,000
1
5,000 35,000 0.75 26,296
4 - 60,000 10,000 - 50,000 0.68 34,151
5
25,
000 60,000 10,000 - 75,000 0.62 46,569
NPV 93,793
(2) NPV analysis of canopy and topless
The net present value of canopy is calculated in the past three year's data. The cost of a canopy
car is 15000 which is a satisfactory cost for a sports car. The rental income an individual gets
from the canopy is around 1000 and the operating cost of the canopy is 20000. The cost that
occurs on servicing of the car is around 10000 and the rate of the canopy is 50000. The salvage
value of canopy car is 50000 which is better from an individual perspective. The salvage is a
term used in finance which means the cost that occurs in avoiding loss of company (Brunzell et.
al., 2013). The equipment and salvage cost of the canopy is 15000 which occurs on the time
when an individual purchase canopy car and then 50000 costs occur in the third year after
purchasing of the car. The income that an individual gets from canopy car is consistently the
same 1000 which an individual gets all the years (Andor et. al., 2015). The operating cost of a
7

canopy is the same for three years. The net income is different for all the years like – in the first
year net income is around 80000 then 70000 and in last year the net income is around 130000,
the last year income is far better than previous years. The depreciation is also different for three
years, in the first year the depreciation is around 0.89% than next year 0.80% and in last year the
depreciation is around 0.71%. The present value for three years is 71,429, 55804 and 92531. The
net present value of canopy is 69764 for all the years. The net present value is calculated when
the total income that an individual gets from than deduct overall expenses from total income.
The cost of purchasing the topless car is 100000 and the rental income an individual gets is
60000. The operating cost is around 10000 and the service cost is around 15000. The value of
salvage is 25000 and the rate is 10%. The net present value of topless is calculated on the basis
of five years of data. The income is consistent for all the years which are 60000 and the
operating cost is also consistent for all the years which are 10000. The service cost is only
occurring one time that is 15000 which is expansive. The income is different for all the years like
– 50000 for the first year than the next four years 50000, 35000, 50000 and 75000. The
depreciation is also occurring different each year 0.91, 0.83, 0.75, 0.68 and 0.62 for five years.
The present value is 45455, 41322, 26296, 34151 and 46569 and the overall NPV is 93792.
The performance and net present value of canopy are much better than a topless car.
Project B
(A) Calculation of NPV and project worth analysis
Year Inv
est
me
nts
(No
te1)
+
Rev
enue
Cas
h
exp
ens
es
Admn.
Exp.
Insta
llme
nt
(Not
e 2)
Deprecia
tion
(Note 3)
E
B
T
Ta
x
(3
0
%)
E
A
T
De
pre
cia
tio
n
Cas
h
flo
w
P.V.
facto
r @
10%
P.
V.
@
10
%
8

Loa
n
(No
te
2) +
Sal
vag
e
(No
te
3)
0
5,6
00 - - - - -
(
5,
6
0
0) -
(5
,6
0
0) -
(
5,6
00) 1.00
(5,
600
)
1 -
5,00
0
2,0
00 300 777 580
1,
3
4
3
40
3
9
4
0
58
0
1,5
20 0.91
1,3
82
2 -
5,50
0
2,1
00 300 777 580
1,
7
4
3
52
3
1,
2
2
0
58
0
1,8
00 0.83
1,4
88
3
9

-
6,05
0
2,2
05 300 777 580
2,
1
8
8
65
6
1,
5
3
2
58
0
2,1
12 0.75
1,5
86
4 -
6,65
5
2,3
15 300 777 580
2,
6
8
3
80
5
1,
8
7
8
58
0
2,4
58 0.68
1,6
79
5 -
7,32
1
2,4
31 300 777 580
3,
2
3
2
97
0
2,
2
6
3
58
0
2,8
43 0.62
1,7
65
6 -
8,05
3
2,5
53 300 777 580
3,
8
4
3
1,
15
3
2,
6
9
0
58
0
3,2
70 0.56
1,8
46
7 -
8,85
8
2,6
80 300 777 580
4,
5
2
1
1,
35
6
3,
1
6
4
58
0
3,7
44 0.51
1,9
21
8
10

-
9,74
4
2,8
14 300 777 580
5,
2
7
2
1,
58
2
3,
6
9
1
58
0
4,2
71 0.47
1,9
92
9 -
10,7
18
2,9
55 300 777 580
6,
1
0
6
1,
83
2
4,
2
7
4
58
0
4,8
54 0.42
2,0
59
10
8,2
00
11,7
90
3,1
03 300 777 580
1
5,
2
3
0
4,
56
9
1
0,
6
6
1
58
0
11,
241 0.39
4,3
34
NPV
14,
452
Note 1
Particulars Cash Outflow
Purchase of Land
5,0
00
Purchase of Building 4,0
11

00
Equipment (WN)
2,4
00
Feasibility Study
2
00
Total
11,6
00
WN
Particulars Amount
Equipment Outflow 3,000
(-) Investment
allowance
6
00
Net Value
2,4
00
Note 2
12