Project Evaluation and Analysis: Managerial Finance Task 2 Report

This report provides a comprehensive project evaluation of RWE Enterprises, focusing on key financial metrics such as cash flow, Net Present Value (NPV), Internal Rate of Return (IRR), profitability index, and payback period. The analysis includes a detailed cash flow diagram, an explanation of NPV advantages and disadvantages, and calculations for IRR and profitability index to determine project acceptability. Furthermore, the report evaluates two distinct projects, calculating their respective payback periods, NPVs, and IRRs, followed by an assessment of their acceptability based on predefined criteria. The projects are then ranked, and a recommendation is made, considering factors like investment size, profitability, and risk. The report concludes with a discussion on the importance of capital budgeting techniques in ensuring sustainable success and safeguarding capital within business enterprises. Desklib offers this and many other solved assignments for students.

Managerial Finance Task 2: Project Evaluation

Table of Contents
Part1: Project evaluation of RWE Enterprises.............................................................................2
A. Cash Flow of concerned project........................................................................................2
B. Explain Net present value.................................................................................................3
C. Calculate the internal rate of return and profitability index..............................................5
D. Calculate the payback period............................................................................................8
Part B: Evaluation of Projects......................................................................................................9
I. Determinate Payback period, net present value and internal rate of return..........................9
II. Evaluation of acceptability of the two projects...............................................................12
III. Rank the two projects and make a recommendation.......................................................14
References:....................................................................................................................................16

Part1: Project evaluation of RWE Enterprises
A. Cash Flow of concerned project
Cash flow: cash flow can be defined as a flow of cash from the activities of an organisation. All
transactions which affect the cash balance of a company included in cash flow statement.
Cash flow diagram of a concerned project denotes all possible outflows and inflows from a
project. The following table denotes the cash inflow and outflow of the project which is
concerning the RWE limited.
Particulars Amounts (AUD)
Initial Investment of project or outflow at o
year -3000000
Return in 1st Year 700000
Return in 2nd Year 700000
Return in 3rd Year 700000
Return in 4th Year 700000
Return in 5thYear 700000
year 5 ( investment at the end of 5th year) -2000000
Return in 6thYear 700000
Return in 7thYear 700000
Return in 8thYear 700000
Return in 9thYear 700000
Return in 10thYear 900000
Note: it is noted that at the end of 5th year, the company has to invest an additional amount of 2
million to continue the inflows from the project. Also at the end of project life, the company will
receive an additional amount from the scrape of machinery and other equipment so inflow of 10th
year will be 700000 + 200000 (Inflow + scrape value) = 900000.

B. Explain Net present value
Definition: In the context of an investment project, net present value can be defined as the
difference between present value of investment amount and the present value of possible
inflows.
A Fact about the money is that one dollar will not be able to purchase that thing after ten years
which it is able to purchase in current time and NPV is used to compute this difference (Weber,
2014). A reduction in the value of money arises due to the inflation rate and such inflation rate
decreases the buying power of money.
NPV has a solution for the same. Selection of a project generates outflow of resources in the
current year but possible benefits from selected project receive in subsequent years. So it is
necessary that organisation should calculate the NPV of the project to find out the profitability of
a project according to the inflation rate.
NPV = Present value of Investment (-) Present value of cash inflows
Advantage of NPV:
 To find the risk of an investment option (Woodruff, 2018)
 To find the profitability of a project according to the Time value of money.
 It clearly shows the value to be gained by the project so management can give an
explanation to the stakeholders on the basis of logical reason.
 Mostly cost of capital rate is used as a discount rate so it provides prevent from less
profitable investment options.
Disadvantages of NPV:
 All possible cash flows are estimated and there is no logical assurance about the receipt
of benefits.
 NPV is not a suitable measurement in that situation when investment value of two
projects different.
 NPV is also not suitable in the case of projects have different inflow life. For example, a
project with useful life five years and another project with useful life twenty years cannot
be appropriately measured on the basis of net present value (Woodruff, 2018).

NPV of the project of RWE:
Particulars Amounts $
NPV
factor NPV
Initial Investment of project -3000000 1 -3000000
Inflow in 1st Year 700000 0.9090909 636363.6364
Inflow in 2nd Year 700000 0.8264463 578512.3967
Inflow in 3rd Year 700000 0.7513148 525920.3606
Inflow in 4th Year 700000 0.6830135 478109.4188
Inflow in 5thYear 700000 0.6209213 434644.9261
year 5 (investment at the end of 5th year) -2000000 0.6209213 -1241842.65
Inflow in 6thYear 700000 0.5644739 395131.751
Inflow in 7thYear 700000 0.5131581 359210.6828
Inflow in 8thYear 700000 0.4665074 326555.1661
Inflow in 9thYear 700000 0.4240976 296868.3329
Inflow in 10thYear 900000 0.3855433 346988.9605
Net present value 136462.9858
NPV is used to find the present value of profitability of a project. NPV may show following
three situations
 Positive NPV: positive NPV means the project is acceptable
 Negative NPV: negative NPV means the project will be rejected (Magni, and Martin,
2017)
 NPV ZERO: it shows the break-even situation.
In above situation, net present value of the project is positive and a project with positive NPV is
acceptable. So RWE can accept the project after considering other aspects of the project.
C. Calculate the internal rate of return and profitability index
Internal rate of return (IRR): internal rate of return is a capital budgeting technique utilised by
the investment and project managers to evaluate the profitability of a project. IRR can be defined

as a break-even rate at which gaining ability of a project becomes zero (Benerjee, 2015). IRR
provides help to investors to measure the profitability of projects on the basis of their yield. It is
a rate which reports the minimum return rate to earn the cost of a project.
Some Advantages of IRR:
 IRR addresses the return on actual investment and ignores repayment assumptions.
 Calculation of Cost of capital does not require.
 Shows Break-even and useful to determinate the profitability.
 Includes risk assessment.
IRR of project of RWE:
Particulars Amounts $
NPV
factor NPV
Initial Investment of project -3000000 1 -3000000
Inflow in 1st Year 700000
0.909090
9
636363.636
4
Inflow in 2nd Year 700000
0.826446
3
578512.396
7
Inflow in 3rd Year 700000
0.751314
8
525920.360
6
Inflow in 4th Year 700000
0.683013
5
478109.418
8
Inflow in 5thYear 700000
0.620921
3
434644.926
1
year 5 (investment at the end of 5th
year) -2000000
0.620921
3 -1241842.65
Inflow in 6thYear 700000
0.564473
9 395131.751
Inflow in 7thYear 700000
0.513158
1
359210.682
8
Inflow in 8thYear 700000 0.466507 326555.166

4 1
Inflow in 9thYear 700000
0.424097
6
296868.332
9
Inflow in 10thYear 900000
0.385543
3
346988.960
5
Net present value
136462.985
8
Internal rate of return 11%
Above IRR represents that a minimum return of 11% is must to achieve the break-even target of
concern project. If above project provides return rate more than 11% it would be acceptable for
the RWE enterprises and if the project provides return less than 11% it would be rejected.
Some disadvantages of IRR:
 Not considers the size of the project.
 More suitable in the case of similar cases.
 It does consider future possible costs which may affect the profitability of the project.
Profitability index: profitability index is also an investment measurement tool utilised by the
investment managers to investigate the relationship between the cost of project and incomes of
the project. It is also known as profitability investment ratio or value investment ratio (Hanks,
2018). This tool measures the suitability of a project on the basis of several factors so that an
organisation can select appropriate investment option.
Profitability Index:
Net present value of project + Amount of initial investment + PV of future cost
amount of Initial investment + PV of future cost
136462+3000000+1241842
3000000+1241842

1.032
Selection of project: profitability index gives ranks to projects according to their profitability
and with the help of this tool investor can choose a highest profitable project. In the case of a
single project, a project with more than one PI will be accepted and a project with less than one
PI will be rejected. In concerned case, PI index of the project is 1.03 which is more than one PI
thus, RWE can accept the project.
Some merits of profitability index:
 Includes time value of money.
 Considers all cash flows.
Limitations of profitability index:
 Not useful in the case of indivisible projects.

D. Calculate the payback period
Definition: payback period is a basic tool of capital budgeting to investigate the gaining ability
of an investment option. Payback period shows the time which is required to an investment
option to gain the initial cost of the project (Erményi, 2015). Recovery of cost of a project is
must to ensure the security of capital from loss and payback period is a best suitable tool to
measure the same.
Need of Payback period: availability of fund is a crucial matter for every business organisation
and if a business organisation manages its funds appropriately it will save the cost and improve
the profit for the organisation. On the basis of payback period, an organisation can easily identify
the future liquidity to ensure the barrier-free operation of the business.
Payback period:
Amount of Inicial investmant + PV of cost incurred at the end of 5 th year
Annual cash flow
3000000+ 1241842
700000
= 6.05 years.
It is finding that the P.B. period of the concerned investment project is 6.05 years so RWE
limited will cover the initial cost of the project in 6.05 years.

Part B: Evaluation of Projects
I. Determinate Payback period, NPV and IRR.
Net present value: NPV is an investment appraisal technique which calculates the net
profitability of investment options after considering time value factor. Net present value is
calculated as follows
NPV = Amount of initial investment (-) Present value of future incomes
Internal rate of return: it is also an investment appraisal technique which is utilised in the
measurement of profitability of investment options. It is a rate which makes the NPV of a project
Zero it means it reports break-even rate.
Payback period: payback period is a period of time in which enterprises will recover its initial
cost of investment.
Project ‘A’ Discounting rate: 12% (NPV and IRR)
Particulars Amount $ PV Factor Present Value
Initial Investment of project -275000 1 -275000
Inflow in 1st Year 50000
0.89285714
3 44642.85714
Inflow in 2nd Year 75000
0.79719387
8 59789.54082
Inflow in 3rd Year 100000
0.71178024
8 71178.02478
Inflow in 4th Year 125000
0.63551807
8 79439.7598
Inflow in 5thYear 175000 0.56742685 99299.69975

6
NPV 79349.88229
Internal Rate of Return 21%
Payback period:
Particulars Amount $ cumulative
Inflow in 1st Year 50000 50000
Inflow in 2nd Year 75000 125000
Inflow in 3rd Year 100000 225000
Inflow in 4th Year 125000 350000
Inflow in 5thYear 175000 525000
Payback period: recovery year' s previous year + Remaining cost
cash inflow ∈next year
: 3+ 50000
125000 = 3.4 years.
Project ‘B’ discounting rate: 12% (NPV and IRR)
Particulars Amount $ PV Factor Present Value
Initial Investment of project -275000 1 -275000
Inflow in 1st Year 100000 0.89285714 89285.71429

3
Inflow in 2nd Year 100000
0.79719387
8 79719.38776
Inflow in 3rd Year 100000
0.71178024
8 71178.02478
Inflow in 4th Year 100000
0.63551807
8 63551.80784
Inflow in 5thYear 100000
0.56742685
6 56742.68557
NPV 85477.62023
Internal Rate of Return 24%
Payback period: Project ‘B’
When a project has same cash inflows throughout the life payback period should be calculated as
below:
Particulars Amount $
Return in 1st Year 100000
Return in 2nd Year 100000
Return in 3rd Year 100000
Return in 4th Year 100000
Return in 5thYear 100000
Payback period (Investment cost / Cash
inflow) 2.75