Business Finance Report: 10-in and 12-in Pipe Production Analysis

This report presents a comprehensive financial analysis of a proposed pipe production project, evaluating its viability through various investment appraisal techniques. The analysis includes the identification of omitted items, preparation of incremental cash flow tables under the most likely scenario, and calculation of Net Present Value (NPV), Internal Rate of Return (IRR), and Profitability Index (PI). Furthermore, sensitivity analyses were conducted to assess worst and best-case scenarios. The report also derives expected sales, standard deviation, and coefficient of variation from sales quantity data. Recommendations are provided regarding the production of 10-in and 12-in pipes, considering the impact of a high discount rate and the potential for increased sales. The analysis concludes that the project is generally viable and provides positive NPVs in most scenarios, indicating a potentially profitable investment. The report emphasizes the importance of investment appraisal techniques in determining project viability and return potential.

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

1
BUSINESS FINANCE
Table of Contents
1. Identifying the relevant items been omitted from the list provided by the accountant in
Exhibit 3:....................................................................................................................................2
2. Preparing the incremental cash flow table for most likely situation:.....................................3
3. Based on the overall estimates calculating the NPV, internal rate of return (IRR) and
profitability index (PI) of the project, when the payback rule with cut-off period of five years
is used by the company:.............................................................................................................6
4. Showing the sensitivity analysis of both worst and best case scenario provided in exhibit 1:
....................................................................................................................................................8
5. Using the data from worst, most-likely and best-cases of sales quantity deriving expected
sales, standard deviation and coefficient variance:..................................................................14
6. Changing the minimum annual increase in sales for making the project worthwhile:........14
7. Depicting whether using high discount rate is viable for using in the project with an
inflation rate of 3%:.................................................................................................................14
8. Providing relevant recommendation for the production of 10-in and 12-in Pipe:...............15
Reference and Bibliography:....................................................................................................17

2
BUSINESS FINANCE
1. Identifying the relevant items been omitted from the list provided by the accountant
in Exhibit 3:
From the overall evaluation of the accounts depicted in exhibit 3, indirect labour and
space account is extra in the overall evaluation of the project. Omitting both the account
would eventually help in identifying the actual cash flow of the organisation, which could be
used in determining relevant profitability. This could eventually help in identifying viable
cash flow, which could be used in determining relevant investment appraisal techniques for
detecting viability of the project (Baum & Crosby, 2014). The overall indirect expense
account mainly represents salary of supervisor, which is adequately stated in the case study
that no extra supervisor will be appointed. The current supervisor that is using of conducting
activities in the organisation will be employed for the new project. Furthermore, the space
amount was directly inclusive of rent, which will not be paid for the current project as
depicted in the case study. The firm will use empty space in the current factory outlet, which
will nullify the expenses of space account.

3
BUSINESS FINANCE
2. Preparing the incremental cash flow table for most likely situation:
Particulars 0 1 2 3 4 5 6 7 8
Initial investment $ 1,000,000
Unit selling price 0.56 0.58 0.59 0.61 0.63 0.65 0.67 0.69
Annual sales 1,650,0
00
1,699,5
00
1,750,4
85
1,803,0
00
1,857,0
90
1,912,8
02
1,970,18
6
2,029,2
92
Revenue 924,
000
980,
272
1,039,9
70
1,103,3
04
1,170,4
96
1,241,7
79
1,317,40
3
1,397,6
33
Raw materials $544,500 $560,835 $577,660 $594,990 $612,840 $631,225 $650,161 $669,666
Distribution cost $33,000 33,
990
35,0
10
36,0
60
37,1
42
38,2
56
39,40
4
40,5
86
Direct labour $40,000 41,
200
42,4
36
43,7
09
45,0
20
46,3
71
47,76
2
49,1
95
On costs $11,520 11, 12,2 12,5 12,9 13,3 13,75 14,1

4
BUSINESS FINANCE
866 22 88 66 55 5 68
Utilities $8,000 8,
240
8,
487
8,7
42
9,0
04
9,2
74
9,55
2
9,8
39
Repairs and Maintenance $7,000 7,
210
7,
426
7,6
49
7,8
79
8,1
15
8,35
8
8,6
09
General factory $18,000 18,
540
19,0
96
19,6
69
20,2
59
20,8
67
21,49
3
22,1
38
Depreciation $
143,000
235,
000
162,0
00
115,0
00
89,0
00
89,0
00
89,00
0
46,0
00
Lost interest $120,000 123,
600
127,3
08
131,1
27
135,0
61
139,1
13
143,28
6
147,5
85
TOTAL $925,020 $1,040,481 $991,645 $969,534 $969,170 $995,576 $1,022,773 $1,007,786
salvage value $ 150,000
PBT (1,0
20)
(60,2
09)
48,3
25
133,7
70
201,3
25
246,2
03
294,63
0
539,8
47
Tax 14,4 40,1 60,3 73,8 88,38 161,9

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BUSINESS FINANCE
- - 98 31 98 61 9 54
PAT (1,0
20)
(60,2
09)
33,8
28
93,6
39
140,9
28
172,3
42
206,24
1
377,8
93
Net Cash flow $
(1,000,000)
141,
980
174,
791
195,8
28
208,6
39
229,9
28
261,3
42
295,24
1
423,8
93

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BUSINESS FINANCE
3. Based on the overall estimates calculating the NPV, internal rate of return (IRR) and profitability index (PI) of the project, when the
payback rule with cut-off period of five years is used by the company:
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
Net Cash flow $
(1,000,000)
141,
980
174,
791
195,8
28
208,6
39
229,9
28
261,3
42
295,2
41
423,
893
Cumulative cash flow $
(1,000,000)
(858,0
20)
(683,2
29)
(487,4
01)
(278,7
62)
(48,8
35)
212,5
07
507,7
49
931,
641
NPV $202,701.90
IRR 14%
Payback period 5.2
Profitability index 1.20
The criteria for selecting the project having only 5 year payback period is not fulfilled by the project, as the payback period is 5.2 years,
which is relevantly higher. Therefore, the current evaluation mainly indicates that the period is not relevant, where the organisation should not
commence with the whole project. However, the other valuations such as NPV and IRR are adequately positive, which indicates viability of the

7
BUSINESS FINANCE
project. Eliasson & Börjesson (2014) mentioned that use of adequate investment appraisal techniques would eventually help in identifying
viability of the project and the returns that it might provide in future.

8
BUSINESS FINANCE
4. Showing the sensitivity analysis of both worst and best case scenario provided in exhibit 1:
Worst Case Scenario
Particulars 0 1 2 3 4 5 6 7 8
Initial investment $ 1,000,000
Unit selling price 0.56 0.58 0.59 0.61 0.63 0.65 0.67 0.69
Annual sales 1,350,0
00
1,390,5
00
1,432,2
15
1,475,1
81
1,519,4
37
1,565,0
20
1,611,9
71
1,660,3
30
Revenue 756,
000
802,
040
850,8
85
902,7
04
957,6
78
1,016,0
01
1,077,8
75
1,143,5
18
Raw materials $445,500 $458,865 $472,631 $486,810 $501,414 $516,457 $531,950 $547,909
Distribution cost $33,000 33,
990
35,0
10
36,0
60
37,1
42
38,2
56
39,4
04
40,
586
Direct labour $40,000 41,
200
42,4
36
43,7
09
45,0
20
46,3
71
47,7
62
49,
195

9
BUSINESS FINANCE
On costs $11,520 11,
866
12,2
22
12,5
88
12,9
66
13,3
55
13,7
55
14,
168
Utilities $8,000 8,
240
8,
487
8,7
42
9,0
04
9,2
74
9,5
52
9,
839
Repairs and
Maintenance
$7,000 7,
210
7,
426
7,6
49
7,8
79
8,1
15
8,3
58
8,
609
General factory $18,000 18,
540
19,0
96
19,6
69
20,2
59
20,8
67
21,4
93
22,
138
Depreciation $
143,000
235,
000
162,0
00
115,0
00
89,0
00
89,0
00
89,0
00
46,
000
Lost interest $120,000 123,
600
127,3
08
131,1
27
135,0
61
139,1
13
143,2
86
147,
585
TOTAL $826,020 $938,511 $886,616 $861,354 $857,745 $880,807 $904,562 $886,028
salvage value $
150,000
PBT (70, (136,4 (35,7 41,3 99,9 135,1 173,3 407,

10
BUSINESS FINANCE
020) 70) 31) 49 33 93 14 489
Tax
- -
(10,7
19)
12,4
05
29,9
80
40,5
58
51,9
94
122,
247
PAT (70,
020)
(136,4
70)
(25,0
12)
28,9
44
69,9
53
94,6
35
121,3
20
285,
243
Net Cash flow $
(1,000,000)
72,
980
98,
530
136,9
88
143,9
44
158,9
53
183,6
35
210,3
20
331,
243
Cumulative cash flow $
(1,000,000)
(927,0
20)
(828,4
90)
(691,5
02)
(547,55
8)
(388,60
4)
(204,96
9)
5,3
50
336,
593
NPV ($186,178.69)
IRR 6%
Payback period
7.0
profitability index 0.
81

11
BUSINESS FINANCE
Best Case Scenario
Particulars 0 1 2 3 4 5 6 7 8
Initial investment $
1,000,000
Unit selling price 0.56 0.58 0.59 0.61 0.63 0.65 0.67 0.69
Annual sales 2,250,
000
2,317,
500
2,387,0
25
2,458,63
6
2,532,39
5
2,608,36
7
2,686,61
8
2,767,2
16
Revenue 1,260,
000
1,336,
734
1,418,1
41
1,504,50
6
1,596,13
0
1,693,33
5
1,796,45
9
1,905,8
63
Raw materials $742,500 $764,775 $787,718 $811,350 $835,690 $860,761 $886,584 $913,181
Distribution cost $33,000 33
,990
35,0
10
36,0
60
37,1
42
38,2
56
39,4
04
40,
586
Direct labour $40,000 41
,200
42,4
36
43,7
09
45,0
20
46,3
71
47,7
62
49,
195
On costs $11,520 11 12,2 12,5 12,9 13,3 13,7 14,