ACC00716: Financial Analysis and Project Viability for Pinto Limited

This report assesses the financial viability of a proposed project for Pinto Limited using various investment appraisal techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), payback period, discounted payback period, and profitability index. The analysis considers the project's cash inflows and outflows, including the opportunity cost of using company space currently rented out. Base case, optimistic, and pessimistic scenarios are evaluated, along with sensitivity analysis to determine the project's resilience to changes in key variables like selling price. The report concludes that the project is financially viable and recommends its immediate commencement to improve Pinto Limited's future income and cash flow. The student has used data from ACC00716 Finance Session 1, 2018 Assessment 3.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Memo to Pinto’s CEO Stating the significance of the new proposed project and the profit it
could obtain overtime:................................................................................................................2
Reference and Bibliography:......................................................................................................6

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Memo to Pinto’s CEO Stating the significance of the new proposed project and the
profit it could obtain overtime:
Memorandum
To: CEO of Pinto Limited
From: Project Analyst
Date: 20-05-2018
Subject: Analysing the new project and detecting its financial viability
Dear Sir,
The memorandum aims in evaluating the proposed projects, which could help in
understanding the level of profits that could be provided from the investment. In addition,
adequate financial appraisal techniques are used in understanding the financial viability of the
project, which could help in improving the level of profits from operations. Moreover, the
cash inflows and outflows are mainly calculated for the project, which indicates financial
viability of the project. The project is evaluated on the basis of investment appraisal
techniques such as Net present value, Internal rate of return, profitability index, discounted
payback period and payback period. The evaluation of the investment option helps in
understanding the level of profits that could be generated from investment.
The cash inflows and outflows of the proposed project is detected by calculating the expense
and income incurred by the proposed project. In addition, the use of external consultant was a
viable approach, which helped in understanding the overall progress and demand that could
be generated from investment. Moreover, the expense on external consultant is not
considered, as initial investment of the project is taken as sunk cost for the company.

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Furthermore, the proposed project will be started in the company space, which is currently let
out for rent purposes. The company is getting a total rent of $ 250,000, which will be
deducted from the cash inflow for deriving the actual income generated from the project. This
measure would eventually allow Pinto Limited to understand the level of income that will be
generated from the project after deducting the rent income. The straight-line depreciation
method is calculated in the analysis, which relatively helps in segregating the cost of
operations1.
Metrix Base Case Value Investment Rating Explanation
NPV $5,596,502.08 High NPV value higher than 0
IRR 21.13% High IRR more than cost of capital
Payback Period 2.73 years High Payback within project life
Discount payback 3.17 years High Payback within project life
Profitability index 1.31 High PI greater than 1
The viability of the investment option can be detected from the above table, where the NPV,
IRR, Payback period, discounted payback period and profitability index of the proposed
project is positive. The value of NPV is higher than 0, which indicates the high level of
returns from investment, while the IRR is higher than the cost of capital value. In addition,
the discounted payback period and payback period is less than the project life, which
indicates financial viability of the proposed project. Moreover, the profitability index is
relatively higher than 1, which indicates the positive attributes of the investment.
Optimistic Scenario Value
Starting sales price $ 90.00
1 Hirshleifer, D, "American Finance Association.". in The Journal of Finance, 72, 2017,
2889-2889.

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NPV $ 9,747,221.20
Pessimistic Scenario Value
Starting sales price $ 60.00
NPV $ 1,445,782.97
Th above table represent the scenario analysis of the proposed projects, which changes with
the selling price of the product. In addition, the secondary analysis indicates that by changing
the sales price net present value of the project could be altered, which could help in
understanding the level of profits from operations. Therefore, increment in the selling price to
$90 would provide an NPV of $ 9,747,221.20, while declining the price to $60 will result in
NPV value of $ 1,445,782.97. Therefore, changes in the selling price will still provide
positive NPV, which relevantly indicates a positive attribute for the proposed project. Hence,
Pinto Limited could alter the sales price in accordance with demand for increasing their
competitive advantage in the market.
-30% -15% 0% 15% 30%
-$2,000,000.00
$0.00
$2,000,000.00
$4,000,000.00
$6,000,000.00
$8,000,000.00
$10,000,000.00
$12,000,000.00
$14,000,000.00
Sensitivity Analysis
WACC Units sold year 1 NWC% yr 1 rev
% Deviation from base case
NPV

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Sensitivity analysis could be detected from the above figure, which represent the financial
viability of the proposed project. In addition, the evaluation from the base case value will
directly change the NPV, Cost of capital and Units sold by the project. The negative
deviation of 30% would eventually lead to negative NPV, while other deviation values would
eventually help in generating high level of returns from investment. The sensitivity analysis
indicates the positive attributes of the proposed project, which could help in generating high
rate of returns from investment.
From the evaluation of investment appraisal techniques, the financial viability of the project
can be identified, which could help in generating high level of returns from investment.
Therefore, Pinto Limited should commence with the proposed project, as it will increase its
future income and generate positive cash flow. Hence, the proposed project should be started
immediately to compensate for their declining revenue.
Sincerely,
Project Analyst

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Reference and Bibliography:
Alvarez, J, "‘Beware: Boundary Crossings’ – A Critical Appraisal of Public Law Approaches
to International Investment Law.". in The Journal of World Investment & Trade, 17, 2016,
171-228.
Hirshleifer, D, "American Finance Association.". in The Journal of Finance, 72, 2017, 2889-
2889.
Kashyap, R, "Fighting Uncertainty with Uncertainty: Time Value of Knowledge and the Net
Present Value (NPV) of Knowledge Machines.". in SSRN Electronic Journal, , 2017.
Mansoori, M, "Investment in Equities : Sharī‘ah Appraisal of Screening Norms.". in Journal
of Islamic Business and Management, 5, 2015, 1-18.
Salci, S, "An Integrated Appraisal of the PPligre Electricity Transmission Line Rehabilitation
Investment.". in SSRN Electronic Journal, , 2017.