Financial Analysis and Capital Budgeting for Powerboat Production

This report provides a comprehensive financial analysis of two powerboat production options (V and T), utilizing capital budgeting techniques to determine the most viable choice for Sonicjet Company. The analysis includes detailed calculations of cash flows, net present value (NPV), and payback periods, considering both quantitative and qualitative factors. The report assesses the initial investment, projected sales, variable costs, and other relevant expenses over a five-year period. The findings indicate that the V powerboat project is the more profitable option due to a higher NPV and a shorter payback period, leading to the recommendation that the company should undertake the production of the V powerboat. The report also addresses qualitative aspects such as opportunity costs, market competition, and environmental concerns. The report also includes appendix with detailed calculation for different rates of return.

Financial management

Executive summary
Financial analysis is required to be made in an effective and the same has been done in the
given report. In this there is the consideration of the proposals for the production of the
powerboat and their evaluation is made in an effective manner. In that, all of the provided
information is considered and with that, the calculations are made which are required for the
making of the decisions in relation to the available options. The use of capital budgeting
techniques has also been made for the identification of accurate results which will help in
taking further actions. With the use of them, the net present value and the discounted payback
period are measured. From the results which are obtained it has been identified that the V
powerboat is the one which shall be undertaken and the process for the same shall be
performed as this will be providing with higher profits and also the payback period is lower
which is always advisable.

Table of Contents
Executive summary....................................................................................................................2
Introduction................................................................................................................................4
Findings......................................................................................................................................4
Quantitative............................................................................................................................4
Qualitative..............................................................................................................................6
Recommendation and justification.............................................................................................6
Detailed comparison and further recommendation....................................................................7
Conclusion..................................................................................................................................7
References..................................................................................................................................8
Appendix....................................................................................................................................9

Introduction
Sonicjet Company is involved in the making of the powerboats and is considering various
alternative approaches that are present. In that there will be a need for additional investment
and the revenues which will be generated will also be different. It is required that all of that
shall be analyzed and this will be done in the report presented below. In this, all of the
information for the making of the analysis will be collected and with the use of that the cash
outflows and inflows which are taking place will be determined. This will be in the interest of
the company as the best approach will be selected. The process which will be undertaken for
this will involve the use of capital budgeting approaches. The quantitative, as well as the
qualitative analysis, will be performed and in that, all the areas will be covered. There are two
options which are available and the performance of the evaluation will be in respect of them.
There will be proper comparison which will be made by using the identified results. This will
be providing help in making the final recommendation which will be beneficial for all.
Findings
Quantitative
All of the cash flows which are made for the identified options which are the V and T
powerboat are available and with the help of that the final cash flows which are made by the
company are calculated (Govindan et al., 2015). The amounts which have been identified for
the various years are as provided hereunder:
Particulars 0 1 2 3 4 5
Designing cost -400000
Cost of Promotion -150000
Cost of Plant -
12000000
Installation cost -160000
Transportation cost -40000
change in Working
capital
-350000
Cost of Market
penetration
-100000
Sales value of V boat 1200000
0
1110000
0
1020000
0
930000
0
840000
0
Sale value of parts 240000 240000 240000 240000 240000
Total Sales 1224000
0
1134000
0
1044000
0
954000
0
864000
0

variable Cost of V boat 4800000 4440000 4080000 372000
0
336000
0
variable Cost of parts 96000 96000 96000 96000 96000
Loss of monthly earnings 60000 60000 60000 60000 60000
Total cost 4956000 4596000 4236000 387600
0
351600
0
Gross profit 7284000 6744000 6204000 566400
0
512400
0
Depreciation 1830000 1830000 1830000 183000
0
183000
0
Fixed factory overhead 120000 120000 120000 120000 120000
EBIT 5334000 4794000 4254000 371400
0
317400
0
Tax @ 30% 1600200 1438200 1276200 111420
0
952200
Net profit 3733800 3355800 2977800 259980
0
222180
0
Depreciation 1830000 1830000 1830000 183000
0
183000
0
Cash inflow 5563800 5185800 4807800 442980
0
405180
0
Recovery of working capital 350000
Salvage value of plant 450000
0
Net cash inflow -
13200000
5563800 5185800 4807800 442980
0
890180
0
It can be noted in the table that all of the expenses which have been incurred for the project
have been considered and in that, all the designing and promotion cost are also covered
(Maravas and Pantouvakis, 2012). There is the plant that will be acquired and all of the
impacts which will be made with that have been included. The impact of the depreciation has
also been provided by which the tax benefit will be received. The working capital investment
and its recovery are incorporated and by that, the net cash inflows which are available with
the business are identified.
All of the identified results are further used for the performance of the calculation in the
capital budgeting techniques. For that the rate of the return is identified at 20% and the same
is taken into use (Mardani et al., 2015). The calculations for the same are provided in the
appendix. In that, it is identified that the payback period of the V project is 4.01 which is less
than the provided period of 4.5 years. This shows that recovery will be earlier than expected
and it is good for the growth of the company as the amount can be invested further. The
positive NPV is obtained for both the powerboats and they are at $3533760.2 and $2083361

for the V and T powerboats. The amount is more for the V powerboat and this is beneficial
for the company.
Qualitative
The above-identified were the quantitative facts but the other theoretical aspects shall also be
considered for the making of the decisions. It is identified that if the company will be
choosing the V powerboat then it will be required to sacrifice the monthly earning which is
currently made on that capacity (Li et al., 2017). It will be considered as the opportunity cost
and will be important for decision making. The undertaking of the project requires the
research which is made and all of the costs which are incurred for the same have been
covered. There is the risk that will be involved in the same as various changes are made
which may or may not be acceptable. It is identified that there is a decline in the sale which is
taking place every year and proper consideration of that together with the reasons is required
(Shrieves and Wachowicz Jr, 2001). The main cause of the same is identified to be high
pollution due to the emission of excessive carbon. This will be harming the environment and
that is a negative factor.
The market is competitive and in that, another option is also available which will be for the 6
years of duration. In that also the cash flows will be made and there will be a reduction in
pollution (Kim, Shim and Reinschmidt, 2013). Due to this competition also the sale of the V
powerboat is declining. The capital structure will have to be maintained and for that company
is funding its requirements with both the equity and debt which will ensure the proper
management of funds.
Recommendation and justification
The analysis of the cash flows which are generated is made and with that, the net present
value and payback period are also derived. It is ascertained that in both cases there is better
performance with the V powerboat and it will have to be undertaken. There will need to make
certain more additions by which the carbon emission can be reduced and it can be made
environment-friendly. This is better than the expected requirements as the recovery of the
cost will be made earlier in 4.01 years which will be making the additional benefits for the
company. The available amount will help in generating the additional cash flows which will
be enhancing the overall business performance.

Detailed comparison and further recommendation
In order to make the final decision, it is highly required that all the available options shall be
compared with one another. In this comparison, there will be consideration of the results
which are obtained with the performance of the calculations under capital budgeting. Detailed
calculations are presented in the appendix. In that, the use of two rates has been made so that
better decision making is initiated (Park and Jang, 2013). The rates which are used include
15% and 20% and with that, further calculation is made. In that, it is identified that with the
decrease in the rate of return there will be an increase in the amount of the NPV which is
obtained. The rate of 5% provides with the NPV of $5679023.7 and payback of 4.98 and at
20% with $3533760.2 and 4.01 years for the V powerboats.
The similar calculations are made for the T powerboat and in that the payback period is 3.51
and 4.36 and NPV is $4410967 and $2083361 at 15% and 20% respectively. With the help of
the calculations, it can be noted that the position of the V powerboat is better as there is a
higher amount of NPV which is made and also the recovery of the cost will be made in the
earlier period (Žižlavský, 2014). This shows that the V powerboats should be manufactured
and then the company will be able to attain all the targets which have been set by it.
Conclusion
The report presented above concludes that the financial analysis shall be made on the highest
priority by which the proper decision making will be made possible. In that, all of the
provided data is considered and there have been various calculations which have been made.
The manner in which the cash flows are changing has been represented and with that, the
amount which will be saved with the company every year is also fluctuating. The net present
value and payback are calculated and with that, it is identified that the making of V
powerboat will be undertaken as that will yield the higher returns.

References
Govindan, K., Rajendran, S., Sarkis, J. and Murugesan, P. (2015) Multi criteria decision
making approaches for green supplier evaluation and selection: a literature review. Journal of
Cleaner Production, 98, pp.66-83.
Kim, B.C., Shim, E. and Reinschmidt, K.F. (2013) Probability distribution of the project
payback period using the equivalent cash flow decomposition. The Engineering
Economist, 58(2), pp.112-136.
Li, R., Chan, Y.L., Chang, C.T. and Cárdenas-Barrón, L.E. (2017) Pricing and lot-sizing
policies for perishable products with advance-cash-credit payments by a discounted cash-
flow analysis. International Journal of Production Economics, 193, pp.578-589.
Maravas, A. and Pantouvakis, J.P. (2012) Project cash flow analysis in the presence of
uncertainty in activity duration and cost. International journal of project management, 30(3),
pp.374-384.
Mardani, A., Jusoh, A., Nor, K., Khalifah, Z., Zakwan, N. and Valipour, A. (2015) Multiple
criteria decision-making techniques and their applications–a review of the literature from
2000 to 2014. Economic Research-Ekonomska Istraživanja, 28(1), pp.516-571.
Park, K. and Jang, S.S. (2013) Capital structure, free cash flow, diversification and firm
performance: A holistic analysis. International Journal of Hospitality Management, 33,
pp.51-63.
Shrieves, R.E. and Wachowicz Jr, J.M. (2001) Free Cash Flow (FCF), Economic Value
Added (EVA™), and Net Present Value (NPV):. A Reconciliation of Variations of
Discounted-Cash-Flow (DCF) Valuation. The engineering economist, 46(1), pp.33-52.
Žižlavský, O. (2014) Net present value approach: method for economic assessment of
innovation projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.

Appendix
Appendix 1: with values
Appendix 2: With formula view