Project Finance: Capital Budgeting, Cost Management and Funding

This project report delves into the core concepts of capital budgeting, emphasizing the evaluation of fixed asset additions and its impact on a company's future. The report examines various capital budgeting tools such as Net Present Value (NPV), Internal Rate of Return (IRR), payback period, and profitability index, highlighting the strengths and weaknesses of each. It explores the crucial role of cost management throughout the project lifecycle, including cost estimation, resource planning, and control strategies. The report also investigates different sources of project funding, including equity finance, debt finance, and venture capital, evaluating their advantages and disadvantages. Furthermore, it addresses critical issues in project start-up, such as scope measurement, risk identification, and resource allocation. The project incorporates a case study on Myer Company, analyzing its equity capital and financial performance. Finally, the report provides financial analysis, including incremental revenue, cash flow, and NPV calculations, to assess the viability of a project.

PROJECT MANAGEMENT
TABLE OF CONTENT

S
PART A......................................................................................................................................3
Executive summary................................................................................................................3
Question 1...............................................................................................................................3
Question 2...............................................................................................................................4
Question 3...............................................................................................................................5
Question 4...............................................................................................................................6
Recommendations..................................................................................................................7
Part B..........................................................................................................................................7
a).............................................................................................................................................7
b).............................................................................................................................................8
i)..............................................................................................................................................8
ii).............................................................................................................................................8
iii)...........................................................................................................................................9
iv)............................................................................................................................................9
REFERENCES.........................................................................................................................10

PART A
Executive summary
Capital budgeting is referred as a procedure for evaluating additions to fixed assets. It is
significant because decisions related to fixed asset investment graphs the future course of the
company. This project is said to be identical, to the decision-making process employed by
individuals engaged in making investment decisions. In this project, finance managers are
required to consider role of cost management, environmental aspects and source of finance.
Question 1
Selection or rejection of new project is based on capital budgeting tools. Further, the steps
engaged in this process are; estimation of cash flows wherein the maturity value, interest or
dividends in a situation of stocks and bonds are considered, whereas the operating cash flow in a
situation of cash flows (Kerzner and Kerzner, 2017). Another step is assessing the risk factor of
cash flow; the next step is the determination of the suitable discount rate on the basis of cash
flows and standard level of rate of interest. Another step is the evaluation of cash flows.
Net present value is the best suitable tool of capital-budgeting; it has stability with the aim of
maximizing the wealth of shareholder. This methodology makes a comparison of the present
value of potential benefits as well as cash flows from the project to the present value of the
potential costs. In a situation where the benefits are higher, then it will result in the selection of
the project (Kerzner, 2018). Further, implementation of IRR can be done; this makes a
comparison of the capital cost of the firm to the RRR creating the net cash flows from the project
equivalent to the cost of the project.
Moreover, a project is agreed when the IRR is higher as compared to the capital cost of the firm.
Other tools are payback period and profitability index, but these are less effective in comparison
to other two methods (Harrison and Lock, 2017). Better rankings are provided by NPV or IRR
on the basis of the assumption of optimal reinvestment rate, whichever is higher. Usually, the
assumption of NPV is comparatively better. Firms have limited capital amount in order to make
a commitment towards the project. In case the firm has raised capital externally to finance certain
positive variables of NPV projects, then the firm will experience increased capital cost. One
other impact of the large budgeting of capital is that firm might go for ration capital that is not
financing all the projects. Firms have limited capital amount in order to make a commitment
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towards the project. In case the firm has raised capital externally to finance certain positive
variables of NPV projects, then the firm will experience increased capital cost. One other impact
of the large budgeting of capital is that firm might go for ration capital that is not financing all
the projects.
Question 2
The cost management plays a great role at every stage of the project. It is inclusive of the
procedure needed to ensure that the completion of the project is within the boundary budget.
Furthermore, it retains activities like cost estimation, controlling and resource planning. The
activities are repeated at every stage until the end of the project. Cost management is engaged in
determining policies, processes, and documentation that are needed to conduct planning,
controlling and implementing the project cost(Heagney, 2016). Cost management plan is the
major output of this entire process. It considers the planning process and budget controlling;
along with this, it contains further activities so as to ensure that the project is cost-effective. The
overall life cycle of the project is covered under cost management from starting phase to ending
phase of the project.
Cost management has high importance in the project as it evaluates controls and optimizes costs
form a mere dashboard (Lock, 2017). It helps in establishing an optimal baseline for the project’s
cost expectations and actions to make sure that is the project is revolving under the budget.
Further; it allows the project manager to conduct cost management activities like monitoring
costs on a real-time basis, so they are aligned with the budget.
The strategies business should adapt to manage the project costs are effective:
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Communication flow
The most significant approach to the project management is effective communication, it is
considered as very important in the life cycle of the project while setting and implementing the
project. This will create transparency thereby making the process seamless (Chang, 2016).
Cost Estimation
One of the most significant approaches is cost estimation in project management, which
exercises the price planning, forecasting of project completion with the appropriate scope.
Budgeting
In project management, when perfect cost estimation is created, then the selected software will
enable to finalize with the approvance of the budget of the project.
Planning
Planning is another integral tool in project management, by considering this aspect project
manager must do planning before starting the project and keep on continuing, developing and
revising it unless and until the project come to an end (Hill, Jones and Schilling, 2014).
Question 3
In order to fund a project, long-term financial sources are equity finance, debt finance and
venture capital and the same are represented and depicted as below:
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Communication flow
Cost estimation
Budgeting
Planning

Equity finance
It is a methodology of raising new capital by putting the shares of the company into sale to
public, financial and institutional investors. The public purchasing the company shares are
known as company shareholders, it is because they have obtained the ownership of the company.
Equity finance comes with no payments of interest, no liability and monthly payments (Gitman,
Juchau and Flanagan, 2015). However, it forces the company to give up its ownership, to the
investors, and there is also the loss of control, along with the distribution of profit.
Debt finance
This financing takes place when a firm raises fund for working capital or capital expenses by
putting debt instruments into the sale to public or institutional investors. In exchange for
borrowing the money, public or institutions are converted into creditors and obtain an assurance
the repayment of interest on the debt. This financial source is inclusive of secured and unsecured
loans. Security is engaged with collateral form as a promise on the repayment of the loan. The
advantage of equity finance is complete ownership of the company (Ehrhardt and Brigham,
2016). On the other hand, the main drawback of this financing is interest; the borrower has to
pay interest on the debt as per the agreement. Also, there are severe lending obligations, it is hard
to obtain equity, particularly for the startups.
Venture capital
Venture capital is a type of long-term financing, provided by investors to small or start-up
companies who are in pursuit of successful long-term growth. It arises from investment banks,
financial institutions, and investors. It benefits the company with business expertise, regardless
of financial backing; acquiring venture capital can assist the startup in holding meaningful
consultation and guidelines with the proper flow of additional resources (Barton and Wiseman,
2014). However, with the acquiring of venture capital, business losses control on its operations,
and also there is a transfer of ownership status.
Question 4
Yes, there are issues related to the start-up of a project that a business is required to consider:
Measurement of project scope
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The project scope is the initial aspect that a business must consider while aiming at the targets
and objectives of the project. Once, a business considers the project scope, and then a proper
plan can be developed (Vom Brocke, Petry and Gonser, 2016). On the other hand, a business
must be fully aware of the changes related to the scope of the project.
Identification of main risks
It is essential to initially identify the main risks associated with the project, in order to solve them
before they arise. Business must consider that what aspects can make the project wrong, and by
considering the business must look for best possible ways to overcome the same.
Optimizing resource allocation
Business must consider the proper utilization of resources from technology to HRM, and they are
required to assign tasks by considering availability and strengths. Further, a business must
conduct optimum utilization of available resources so as to prevent any issue.
These aspects are important bro maximize the resources, eliminate risks associated with the
project while meeting the overall goals and targets of the project. These can have a direct or
indirect impact on the project conducted effectively non-effectively (Nicholas and Steyn, 2017).
When the project is finished, it is positioned at a realistic chance of getting things on a real-time
basis, while taking the suitable measures and taking appropriate tools into account
Projects are wound up when they are completely finished, and the aims and targets are met. They
are resource or infrastructure considerations, due to the
Recommendations
Investment project involves high amount of funding thus company should make use of proper
tools for assessment in order to make viable decision. Usually, the assumption of NPV is
comparatively better than other tools. Further; cost management is considered as very important
to each individual associated with the project. The project manager is required to estimate the
cost to make sure that the returns are higher to create a worthwhile and meaningful project.
Another crucial aspect in decision making is selection of source of finance which is required to
be taken by considering all pros and cons to ensure minimum finance cost. Project manager is
also recommended to consider environmental issues in decision making as these are associated
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with the project, as there are scrap and waste materials which are required to be disposed of in a
sustainable and green way, creating no impact to the environment.
PART B
a)
No, Myer Company has equity capital on the issue as the value of common equity stock in the
year 2016 was $779963 which remains the same in the next year that is in 2017 as $779963
(Myer Holdings Ltd, 2018).
An entity raises equity capital to meet the higher funding requirement of a business. Equity
capital raises by an entity in two ways such as selling or common or ordinary shares or preferred
shares which helps in attracting the interest of the entire investors in the external market (Caselli
and Negri, 2018). It is generally used by an enterprise to meet the giant funding requirements.
The biggest reason behind the decrease in the profit of Myer in the year 2018 is due to conflict
with its largest shareholder who significantly influences the performance of the company is
Billionaire Solomon Lew’s Premier investments in Myer company (Reason for the drop in the
sale of Myer, 2018).
b)
i)
Y
e
ar
Rev
enu
e
Incre
asing
%
Incremen
tal
Revenue
Sale
of
store
Ta
x
rat
e
C
os
ts
Worki
ng
capital
Depr
eciati
on
Profit after
tax and
depreciation
Depr
eciati
on
Cas
h
flo
w
1 5.5 2% 5.61 0 0.6
2.
2 0.5 3.91 0.5 4.41
2
5.6
1 2% 5.72 0.00
0.6
0
2.
2
4 0.5 3.98 0.5 4.48
3
5.7
222 2% 5.84 0.00
0.6
0
2.
2
9 0.5 4.05 0.5 4.55
4
5.8
366
44 2% 5.95 0.00
0.6
0
2.
3
3 0.5 4.12 0.5 4.62
5
5.9
533
77 2% 6.07 9.00
0.6
0
2.
3
8 2 0.5 11.59 0.5
12.0
9
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ii)
Year Cash flow Pv@14% Present value
Initial investment 10
1 4.41 0.952381 4.2
2 4.4782 0.907029 4.06
3 4.547764 0.863838 3.93
4 4.618719 0.822702 3.80
5 12.09109 0.783526 9.47
Total 25.46
NPV 15.46
Net present value method is one of the approaches to capital budgeting which helps in assessing
the future profitability of a particular project. Higher or positive NPV signifies the efficiency or
deficiency of a project to select or reject the same (Marchioni and Magni, 2018). NPV of the
current project is 15.46 is higher as this project has covered the initial cost of a project that is $10
million.
iii).
Year Cash flow Pv@14% Present value
Initial investment 9.5
1 4.1895 0.952381 3.99
2 4.256 0.907029 3.86
3 4.3225 0.863838 3.73
4 4.389 0.822702 3.61
5 11.4855 0.783526 9.00
Total 24.19
NPV 14.69
Due to changes in the Canadian dollar from $1 Canadian dollar to $0.95 the net present value of
the above project gets decreases to $14.69 from $15.46 that means the decrease of $0.77. When
comparing the two projects where the cost of the project remains the same but its outcome gets
changes due to the changes takes places in the dollar value of Canada. The similar project with
lesser net present value is rejected as compared to the earlier project with a higher NPV.
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iv)
It is suggested to an entity to select a project with a higher net present value of a project worth of
$15.46 by rejecting a project worth of an NPV of $14.69. The changes take places in the
project’s NPV value due to changes takes places in the currency of Australian and the Canadian
Dollar. First project’s NPV is higher due to the constant currencies value of both the Australian
and Canadian Dollar. Similarly, in the second project decrease in value from $1 dollar to $0.95
dollar will, in turn, decreases the profitability of Myer.
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REFERENCES
Books and Journals
Barton, D. and Wiseman, M., 2014. Focusing capital on the long term. Harvard Business
Review. 92(1/2). pp.44-51.
Caselli, S. and Negri, G., 2018. Private equity and venture capital in Europe: markets,
techniques, and deals. Academic Press.
Chang, J. F., 2016. Business process management systems: strategy and implementation.
CRC Press.
Ehrhardt, M. C. and Brigham, E. F., 2016. Corporate finance: A focused approach. Cengage
learning.
Ehrhardt, M. C. and Brigham, E. F., 2016. Corporate finance: A focused approach. Cengage
learning.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach.
Routledge.
Heagney, J., 2016. Fundamentals of project management. AMACOM Div American Mgmt
Assn.
Kerzner, H. and Kerzner, H.R., 2017. Project management: a systems approach to planning,
scheduling, and controlling. John Wiley & Sons.
Kerzner, H., 2018. Project management best practices: Achieving global excellence. John
Wiley & Sons.
Lock, D., 2017. The essentials of project management. Routledge.
Marchioni, A. and Magni, C. A., 2018. Investment Decisions and Sensitivity Analysis: NPV-
Consistency of Rates of Return.
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Martinelli, R. J. and Milosevic, D. Z., 2016. Project management toolbox: tools and
techniques for the practicing project manager. John Wiley & Sons.
Nicholas, J.M. and Steyn, H., 2017. Project management for engineering, business and
technology. Taylor & Francis.
Vom Brocke, J., Petry, M. and Gonser, T., 2016. Business process management. In A
Handbook of Business Transformation Management Methodology (pp. 137-172). Routledge.
Online
Myer Holdings Ltd, 2018. Available through:
<https://au.finance.yahoo.com/quote/MYR.AX/balance-sheet?p=MYR.AX> [Accessed on
19th May 2018].
Reason for drop in sale of Myer, 2018. Available through: <
https://www.smh.com.au/business/companies/myer-profits-slump-as-stocktake-sale-flops-
shares-hit-all-time-low-20180209-p4yzsi.html > [Accessed on 19th May 2018].
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