Financial Analysis: Plant Purchase, Installation, and Replacement

This report presents a detailed financial analysis of plant purchase, installation, and replacement decisions. It explores key financial concepts such as annual worth, present worth, and internal rate of return (IRR) to evaluate different alternatives. The report includes calculations for annual worth, present worth, and IRR for various plant options (A, B, C, and D), demonstrating how these metrics are used in capital budgeting. It also examines the conventional and modified benefit-cost ratios, leasing alternatives, and the calculation of equivalent annual costs. Furthermore, the report analyzes the Qantas group, discussing how accounting tools like life cycle costing can be integrated into decision-making and monitoring processes. The analysis identifies gaps in the implementation of these tools and provides recommendations for improvement, ensuring value creation for stakeholders.

Running head: PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Plant purchase, Installation and replacement
Name of the Student:
Name of the University:
Authors Note:

1PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Table of Contents
Answer to Question 1......................................................................................................................2
a)..................................................................................................................................................3
b)..................................................................................................................................................3
c)..................................................................................................................................................4
Answer to Question 2......................................................................................................................5
Answer to Question 3......................................................................................................................6
1...................................................................................................................................................6
2...................................................................................................................................................7
Answer to Question 4......................................................................................................................7
Answer to Question 5......................................................................................................................8
Reference.......................................................................................................................................13

2PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Answer to Question 1
Concepts of annual worth, present worth and internal rate of return is very significant for
capital budgeting decisions:
a) Present Worth-
It refers to the process of discounting the future cash flows of the company for the
various variables that are present in the economy and might affect the real value of the
cash flows received by the entity. The factors that can affect the real value include
inflation rate, the systematic risks undertaken by the investors and the returns that is
expected by the shareholders of the company (Daylan & Ciliz, 2016).
b) Internal rate of return-
The percentage of the returns that is being given out by project to the company is termed
as the internal rate of return. It must be ensured that the internal rate of return of the
project must be more than the cost of capital of the company. The cost of capital is the
amount that is paid by way of interest and the repayment of the principle to the lenders of
the company. If the internal rate of return will be less than this cost of capital of the
company no real value creation will take place in respect of the shareholders of the
company. It is seen that net present value of the project may be positive and still the
project is rejected due to the increased amount of cost of capital of the company.
c) Annual worth-
The value in terms of revenue that is being generated by a project in a span of one year is termed
as annual worth of the project. This is one of the most significant information from the point of
view of the management of the company in respect of the capital budgeting decisions taken up

3PLANT PURCHASE, INSTALLATION AND REPLACEMENT
by it. The reason being that using this information the company is able to determine the number
of years it will take to recover the entire amount of investment being made by the company in the
project.
a)
Calculation of the Annual Worth of different Alternatives
Particular A B C D
Supply units 5000 5000 5000 5000
Sales price per unit $3.00 $3.00 $3.00 $3.00
Sales (1) $15,000.00 $15,000.00 $15,000.00 $15,000.00
Fixed Cost $10,000.00 $14,000.00 $20,000.00 $30,000.00
Capital Recovery Factor
0.2296073
8
0.2296073
8
0.2296073
8
0.2296073
8
(A/PIN) (2) $2,296.07 $3,214.50 $4,592.15 $6,888.22
Salvage value $500.00 $700.00 $1,000.00 $1,500.00
Sinking Fund factor
0.1296073
8
0.1296073
8
0.1296073
8
0.1296073
8
(A/F, I, N) (3) $64.80 $90.73 $129.61 $194.41
Annual Labor cost (4) $9,000.00 $7,500.00 $5,000.00 $3,000.00
Annual Power and maintenance cost
(5) $500.00 $800.00 $1,000.00 $1,500.00
Annual Worth (1-2+3-4-5) $3,268.73 $3,576.22 $4,537.46 $3,806.19
b)
Calculation of the Present Worth of different Alternatives
Particular A B C D
Sales $15,000.00 $15,000.00 $15,000.00 $15,000.00

4PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Less:
Annual Labor cost $9,000.00 $7,500.00 $5,000.00 $3,000.00
Annual Power and maintenance cost $500.00 $800.00 $1,000.00 $1,500.00
Depreciation $1,583.33 $2,216.67 $3,166.67 $4,750.00
Taxable Income $3,916.67 $4,483.33 $5,833.33 $5,750.00
Less:
Tax Payment $1,175.00 $1,345.00 $1,750.00 $1,725.00
Net Income after tax $2,741.67 $3,138.33 $4,083.33 $4,025.00
Add:
Depreciation $1,583.33 $2,216.67 $3,166.67 $4,750.00
Annual Cash inflow after tax $4,325.00 $5,355.00 $7,250.00 $8,775.00
Present value factor of Annuity 4.3553 4.3553 4.3553 4.3553
Present Value of cash inflow after tax $18,836.50 $23,322.42 $31,575.64 $38,217.41
Salvage Value $500.00 $700.00 $1,000.00 $1,500.00
Present value factor
0.5644739
3
0.5644739
3
0.5644739
3
0.5644739
3
Present value of salvage $282.24 $395.13 $564.47 $846.71
Fixed Cost (initial Investment) $10,000.00 $14,000.00 $20,000.00 $30,000.00
Present Worth $9,118.74 $9,717.55 $12,140.11 $9,064.12
c)
Calculation of IRR of different Alternatives
Particular A B C D
Year 0 -$10,000.00 -$14,000.00 -$20,000.00 -$30,000.00
Year 1 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 2 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 3 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 4 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 5 $18,836.50 $23,322.42 $31,575.64 $38,217.41
Year 6 $19,336.50 $24,022.42 $32,575.64 $39,717.41
Internal Rate of Return 188% 166% 157% 126%

5PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Answer to Question 2
The method of the conventional benefit cost ratio contains the net revenue that has been
received from the project by the company and the denominator FO the formula contains the costs
that have been incurred by the company in respect of the project. On the other hand, in case of
the modified benefit, cost ratio the numerator of the formula contains the revenue generated by
the project minus the operating costs incurred and the maintenance costs incurred by the
management in the project and the denominator contains only the initial cost incurred in respect
of the project (Ciroth et al., 2015).
There are differences in the formulas used up by both of the methods but the
recommendation that is being received by the methods is same in both the cases. The reason
being that in both the cases, the numerator is represented by the revenue that has been generated
by the project and the numerator is representing the costs that have been incurred by the
company. If the revenue generated by the project is more than the costs incurred then the project
will be accepted and in other case its will be rejected.
If the numerator of the methods is more than the denominator the methods will yield a result that
will be more than one and incase the denominator is more than the numerator the answer will be
less than one. Hence, in case the answer is more than one the project will be accepted and if the
answer is less than one the project will be rejected.
Conventional Benefit cost ratio value using Present worth method

6PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Calculation of Conventional B/C Ratio Value using Present Worth method

7PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Particulars Machine A Machine B
Fixed Costs $20,000.00 $30,000.00
Salvage Value $2,000.00 $0.00
Annual receipt $150,000.00 $180,000.00
Annual Disbursement $138,000.00 $170,000.00
Present worth Factor of Annuity 6.144567106 6.144567106
Present worth Factor of Single payment 0.385543289 0.385543289
Present worth of benefit $921,685.07 $1,106,022.08
Present worth of annual disbursement $847,950.26 $1,044,576.41
Present value of salvage $771.09 $0.00
Initial Cost $20,000.00 $30,000.00
B/C Ratio value 1.06 1.03
Modified B/C Ratio value using Present worth benefit
Calculation of Modified B/C Ratio Value using Present Worth method
Particulars Machine A Machine B
Fixed Costs $20,000.00 $30,000.00
Salvage Value $2,000.00 $0.00
Annual receipt $150,000.00 $180,000.00
Annual Disbursement $138,000.00 $170,000.00
Present worth Factor of Annuity 6.144567106 6.144567106
Present worth Factor of Single payment 0.385543289 0.385543289
Present worth of benefit $921,685.07 $1,106,022.08
Present worth of annual disbursement $847,950.26 $1,044,576.41
Present value of salvage $771.09 $0.00
Initial Cost $20,000.00 $30,000.00
B/C Ratio value 3.83 2.05

8PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Answer to Question 3
1.
Calculation of the After Tax Cash flow of the Leasing alternatives
Particulars 1 2 3 4 5 6 7 8 9 10
Lease Cost 80000 60000 50000 50000 50000 50000 50000 50000 50000 50000
Other costs 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000
Total Costs 84000 64000 54000 54000 54000 54000 54000 54000 54000 54000
Tax savings on expenses 25200 19200 16200 16200 16200 16200 16200 16200 16200 16200
After Tax Cash Flow 58800 44800 37800 37800 37800 37800 37800 37800 37800 37800
2
Calculation of Equivalent Annual cost for the alternative ($)
Particulars 1 2 3 4 5 6 7 8 9 10
After Tax Cash Flow 56000 42000 35000 35000 35000 35000 35000 35000 35000 35000
PV factor 0.9091
0.826
4
0.751
3
0.683
0
0.620
9
0.564
5
0.513
2
0.466
5
0.424
1
0.385
5
PV of Cash flow 50909 34711 26296 23905 21732 19757 17961 16328 14843 13494
Net Present Value 239936
Annuity Factor
6.14456710
6
Equivalent Annual Leasing Costs 39048
Other costs 4000
Equivalent Annual Cost 43048
Answer to Question 4
Calculation of equivalent Annual cost of alternative options
Particulars Keep X Replace X with Y Replace X with Z
Initial Cost $0.00 $100,000.00 $160,000.00
Annual Maintenance and Operating
cost $90,000.00 $70,000.00 $60,000.00
Salvage Value $0.00 $30,000.00 $50,000.00
PVAs Factor 0.3855433 0.385543289 0.385543289
PV of Salvage $0.00 $11,566.30 $19,277.16

9PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Net Initial Cost $0.00 $88,433.70 $140,722.84
Annuity Factor 6.1445671 6.144567106 6.144567106
Equivalent Annual Cost $90,000.00 $84,392.18 $82,901.99
Answer to Question 5
Introduction:
The company that is being undertaken for conducting this study is Qantas group. The company
is engaged in the business of airline. It operates both international and domestic flights. It is
regarded as one of the most significant companies of Australia. The company operates more than
124 aircraft and employs more than 3000 employees.
The present reports presents the various ways in which the accounting tools such as life cycle
costing are being used by the management and the same can be integrated in the decision making
and monitoring process of the management. The integration of these tools ensures that the
decisions taken up by the management ensures that value is being created by it for the
stakeholders of the company (Bierer et al., 2015). Along with it certain gaps present within the
operations of the Qantas group is identified. The identification of these gaps will ensure that the
company is able to find ways in which these gaps can be alleviated by the company. After
conducting the process of identification several recommendations will be made to the
management of the company.
Gaps that have been identified in the system:

10PLANT PURCHASE, INSTALLATION AND REPLACEMENT
The availability of various accounting and the management tools has helped immensely in
improving the decision making process of the management. However, these tools also carry with
them certain gaps in respect of their application. The Quanta’s group is facing these gaps in the
process of their implementation due to the unique features and the inherent characteristics of the
tools used by the management. The management of the company must not deviate from using
these tools effectively the reason being that the loss due to the gaps present is less than the value
that is being provided by these tools. The management should focus its efforts in respect of better
implementation of these tools. The Amin motive of pointing out the gaps present is to ensure
ways in which these can be alleviated rather than determining the utility provided by them to the
management. Certain gaps that have been found in the implementation process of the quanta’s
group are as follows:
a) For the purpose, FO nominal cash flows the management must make use FO the nominal
cash flows of the company. In case the management of the company is making use of the
actual rates, it must factor in the fluctuations in the price level index and the variability in
the inflation rate of the economy.
b) In the process of monitoring of the costs incurred by the company, the management must
factor in the various systematic risks that are being incurred by the investors of the
company. The need for factoring in the risks undertaken by them arises because in return
of the systematic risk incurred by them, they expect significant amount of returns from
the company.
c) For assigning the weights, the management of the company mist make sure to utilise the
market value of the various financial resources used by it. It is very much possible that
the market value fo these resources may not be readily available with the management, in

11PLANT PURCHASE, INSTALLATION AND REPLACEMENT
those cases the management must makes sure to utilise the available information with it
in this respect.
d) For conducting the capital budgeting decisions of the company, the management of the
company make use FO the discounting rates extensively. It must be ensured on the part of
the management that the discounting rate that is being used makes sure to factor in
variables like the fluctuations in the inflation rates of the economy, the variability
involved in the estimated future cash flows of the company, the systematic risk that are
being borne by the investors of the company etc. In addition to these factors, there are
wide ranges of other factors that affect the rates and these factors may or may not be in
the control of the management.
The various recommendations to the management in respect of cost/ benefit and risk
management:
The management must ensure the generation of the cash flows by the company on a
consistent basis. The process of generation of the revenue of the company starts from the
process FO continuous monitoring of the costs that are being incurred by the company and
their respective implication on its operations. In the absence of the proper monitoring of the
costs that are incurred by the company the use of various accounting and the management
tools by the management will become ineffective. In addition to this, it is of utmost
importance that the internal control systems of the company are kept in full functioning
situations (Woon & Lo, 2016). The internal control systems assist the management in the
cost control procedure of the company. Hence, some of the recommendations to be made to
the management in this respect are as follows:

12PLANT PURCHASE, INSTALLATION AND REPLACEMENT
a) For the purpose FO increasing the reliability FO the airlines due consideration must be
given by the management regarding the safety of the aircraft. Because in the case of an
airline company the priority should always be the safety of the passengers. Any mistake
on the part of the management of the company can lead to loss of lives. Hence, the
procedures for ensuring the safety of the airlines must be given due focus and utmost
attention on immediate basis and the required changes from time to time must be made in
them.
b) The discounting rate used up by the management must factor in various factors that affect
the financial performance and the financial position of the company. Some of the factors
that should be taken care of by the discounting rate include variability fluctuations in the
inflation rate of the economy, the changes that might occur in eh pattern of the cash flows
of the company and the various external and internal factors that might affect the
operations of the company in the future.
c) For ascertaining, the weights to be used for the purpose of capital budgeting decisions the
management must make sure to utilise the market values of the financial sources that
have been used by the company.
Conclusion:
The cost implications of the decisions that re taken up by the management severely affects the
future cash flows and the revenue generation opportunities of the company. The decisions
regarding the acceptance of the prospective projects must be made by keeping in mind the
returns that will be generated by them in respect of the shareholders due importance must be
given by the management to the decisions regarding the transactions involving fixed assets of the
company. The reason for this is that for granting revenues the company will have to make use

13PLANT PURCHASE, INSTALLATION AND REPLACEMENT
FO the fixed assets available with it. In addition to that, the management of the company must
make sure to use the right kind of tools for making its decisions. The effective utilisation of the
tools by the management will ensure that the decisions taken by it adds value to the shareholders
of the company in the end.

14PLANT PURCHASE, INSTALLATION AND REPLACEMENT
Reference
Bierer, A., Götze, U., Meynerts, L., & Sygulla, R. (2015). Integrating life cycle costing and life
cycle assessment using extended material flow cost accounting. Journal of Cleaner
Production, 108, 1289-1301.
Ciroth, A., Hildenbrand, J., & Steen, B. (2015). Life cycle costing. Sustainability Assessment of
Renewables-Based Products: Methods and Case Studies,, 215-228.
Daylan, B., & Ciliz, N. (2016). Life cycle assessment and environmental life cycle costing
analysis of lignocellulosic bioethanol as an alternative transportation fuel. Renewable
Energy, 89, 578-587.
Woon, K. S., & Lo, I. M. (2016). An integrated life cycle costing and human health impact
analysis of municipal solid waste management options in Hong Kong using modified
eco-efficiency indicator. Resources, Conservation and Recycling, 107, 104-114.