Water Pty Ltd Project: Financial Analysis Case Study ACC00716

This assignment presents a comprehensive financial analysis of a proposed project for Water Pty Ltd, focusing on improving transportation services. The analysis includes a detailed spreadsheet with calculations for Net Present Value (NPV), Internal Rate of Return (IRR), and scenario analysis (best and worst case). The spreadsheet covers a 7-year period, considering investment, annual cash flow, sales revenue, variable and fixed costs, depreciation, and after-tax profit. A memo to the CEO outlines capital budgeting techniques, including NPV, IRR, profitability index, cash flow estimation, WACC, sensitivity analysis, and scenario analysis, emphasizing their importance in making informed investment decisions. The conclusion recommends investing in the project based on the financial analysis, supporting improved transportation for Water Pty Ltd. The report references relevant books and journals to support the financial analysis and decision-making process.

Business case study

Table of Contents
INTRODUCTION ..........................................................................................................................1
TASK...............................................................................................................................................1
1) Spread sheet ...........................................................................................................................1
B) Memo.....................................................................................................................................2
CONCLUSION................................................................................................................................5
REFERENCES ...............................................................................................................................6

INTRODUCTION
The detail and systematic examination of available financial data which support in
reaching the appropriate decision is known as financial analysis (Buchanan, 2014). This mainly
include the analysis of overall projected and historical cash flow, risk and profitability that
support in allocating the resources. It is determined that accurate financial analysis is performed
upon the information that is presented in annual statement so that decision are meaningful.
In this report, financial analysis of the proposed project for Water Pty Ltd is determined
which help in making better decision to improve the transportation services.
TASK
1) Spread sheet
Financial analysis of the proposed project
N Year 0 1 2 3 4 5 6 7
Investmen
t (I)
Initial cash flow
(5* 2M)
-
10000
000
Annual cash
flow
a Sales revenue
15000
000
15750
000
16537
500
17364
375
18232
593.75
19144
223.43
75
20101
434.60
9375
b Variable cost
-
80000
00
-
83200
00
-
86528
00
-
89989
12
-
93588
68.48
-
97332
23.219
2
-
10122
552.14
7968
c Fixed cost
-
40000
00
-
40000
00
-
40000
00
-
40000
00
-
40000
00
-
40000
00
-
40000
00
1

d
Depreciation
(10M/7)
-
14285
71
-
14285
70
-
14285
69
-
14285
68
-
14285
67
-
14285
66
-
14285
65
e= a-
(b+c+d)
Operating profit
before tax
15714
29
20014
30
24561
31
29368
95
34451
58.27
39824
34.218
3
45503
17.461
407
f=e* (1-
0.25) Profit after tax
11785
71.75
15010
72.5
18420
98.25
22026
71.25
25838
68.702
5
29868
25.663
725
34127
38.096
05525
g Depreciation
14285
71
14285
72
14285
73
14285
74
14285
75
14285
76
14285
77
h= f+g
After tax cash
flow
26071
42.75
29296
44.5
32706
71.25
36312
45.25
40124
43.702
5
44154
01.663
725
48413
15.096
05525
cf Net cash flow
-
10000
000
26071
43
29296
43
32706
68
36312
40
40124
37
44153
93
48413
05
PV=(cf/
1.07ΛN) Present value
-
10000
000
24365
82.242
99065
25588
63.656
21452
26698
39.344
41485
27702
55.609
79545
28608
12.127
04891
29421
62.790
64386
30149
21.439
13458
Sum of
PV NPV
92534
37.210
24283
Average of Cash
flow
36725
47
ARR
36.725
47
2

Scenario Analysis
Best Case NPV
Net cash flow -10000000
26071
43
29296
43
32706
68
36312
40
40124
37
44153
93
48413
05
Present value @
5% -10000000
24829
93.333
33333
26572
72.562
35828
28253
25.990
71375
29874
30.134
56327
31438
49.380
8062
32948
34.238
80159
34406
25.076
96561
NPV
10832
330.71
7542
Worst Case NPV
Net cash flow -10000000
26071
43
29296
43
32706
68
36312
40
40124
37
44153
93
48413
05
Present value @
9% -10000000
23918
74.311
9266
24658
21.900
51342
25255
55.798
36436
25724
61.963
42838
26078
08.741
84477
26327
54.581
2312
26483
59.624
73118
NPV
78446
36.922
03993
Sensitivity Analysis
Base Scenario -10000000 2607143 2929643 3270668
363124
0
401243
7
441539
3
484130
5
Optimistic scenario -11000000 2867857 3222607 3597735 399436 441368 485693 532543
3

(+10%) 4 1 2 6
Pessimistic scenario (-
10%) -9000000 2346429 2636679 2943601
326811
6
361119
3
397385
4
435717
5
Base Scenario
Cash Flows -10000000 2607143 2929643 3270668
363124
0
401243
7
441539
3
484130
5
PV @ 7% -10000000
2436582.
24299065
2558863
.656214
52
2669839
.344414
85
277025
5.60979
545
286081
2.12704
891
294216
2.79064
386
301492
1.43913
458
NPV
9253437.
21024283
IRR 18.82%
Optimistic scenario
(+10%)
Cash Flows -11000000
2867857.
3
3222607
.3
3597734
.8
399436
4
441368
0.7
485693
2.3
532543
5.5
PV @ 7% -10000000
2680240.
46728972
2814750
.021835
97
2936823
.278856
33
304728
1.17077
5
314689
3.33975
38
323637
9.06970
825
331641
3.58304
804
NPV
11178780
.9312671
IRR 22.19%
B) Memo
MEMORANDUM
4

T0: CEO of On
the Water Pty Ltd
There have been different methods that are used to detriment the actual feasibility and
appropriateness of investment made by the respective company that support in reaching the
meaningful results. Some of these are discussed below:
Capital budgeting: In case, if company implement the new machinery or extend a product
range or even upgrade the existing machinery, companies make capital expenditure (Capital
Budgeting, 2020). Capital spending includes money being spent by a corporation on buying or
selling supplies, property or equipment used for the development or operation of its reliable
customers. In general term, capital Budgeting is indeed a method of judgement making in
which a company or government plans and calculates long-term capital costs of which the cash
flow earnings are supposed to come after a year. It includes defining capital in balances and
cash out flows instead of calculating income and spending expenditure and it consider
adjustments for the time worth of money. Many techniques of evaluating capital budgeting are
being used to assess the financial viability of an expenditure of resources. The periods involve
paybacks, discounted payments period, Net present value, Internal return rate etc. In order to
determine the value of investment for transportation services NPV and IRR have been
calculated which help in making suitable decision. Importance of these methods are discussed
below:
Net Present Value: The definition of net present value (NPV) includes discounting a future
revenues in context of the present value. The cash inflows can be positively or negatively
(money paid). The original investment's actual value is full facial interest, provided that the
investment is produced at the outset of the phrase. At the conclusion of the review cycle, the
closing cash flow including any gross gains or fair market value of the financial instrument.
Profitability Index or ARR: The profitability or productivity measure is computed by
dividing the current value of the capital expenditure cash flows by the current value of the
capital expenditure cash outflows. The capital investment is approved when the productivity
ratio is higher than one and when the capital investment is below one, the investment is
declined due to lower profitability (Ehrhardt and Brigham, 2016).
Cash flow estimation: Expenditure cycles that are intended to last over one year, i.e. Long-
term expenditure, are defined, analysed and chosen cash flow. There are some major
5

importance of cash flow that are beneficial for making the decision to implement the required
ferries for making ease transportation.
 Impact the business's productivity and profits and have a long term impact.
 Without a financial loss not possible and reverse.
 The Problems In Investment decision are associated with large costs and small
resources
 Contribute to an uncertain economic time with different risks.
 Costs and income increase at various times.
Discount rate & WACC: The weighted average cost of capital (WACC), when contrasting the
corporate debt and equity arrangement, is a quantitative formula that measures the cost of
investment and purchase of the company. Compare the debt weighted as well as the actual cost
of debt or receiving funds by shareholder funding, according to the levels of debt and capital in
the business, of current capital acquisitions and expansions (Genest, Gendron and Bourdeau-
Brien, 2013). Cash balances on an after-tax basis must be assessed since the original
investment on a project involves after-tax financial values, the investment benefits must be
assessed in almost the same units, actually after-tax present value. In the above calculation, it is
assumed that the rate of average cost of capital which is 7 % is consider as the discount factor
that support in determining the net value of the initial investment.
Sensitivity Analysis: The methodology used to evaluate how independence variable factors
influence a certain dependent factor is known as sensitivity analysis underneath a specific
number of assumptions. The use depends on one or even more input factors throughout the
certain parameters, like how interest rate rises will affect the value of a investment. There are
some specific steps that are used by the company while conducting sensitivity analysis in the
transportation services. Such as:
 First the performance of the basic case becomes determined such as the NPV of a given
base case input value in context to which sensitivity is being to be calculated. On the
other side all other input models are remain fixed.
 Furthermore the value of the results at a specific new value of input are determined and
other remain constant.
 In addition the percentage change in the input and the percentage variation in the output
are measured (Maxfield, 2019).
6

 In last, to measure the actual sensitivity the percentage modification in output to the
input are being determined.
The sensitivity evaluation pattern continued with respect to another input thus holding the
existing inputs unchanged before sensitivity for every variable that is achieved. The
corresponding approach is also applied that actually needs the solution of basic partial variables
to examine sequential sensitivity. While this technique is computer-efficient, it is an exhausting
challenge to solve calculations. The choosing of a certain series of tests for a defined variable is
included and the configuration for the configurations will then be performed. The output is then
used to execute sensitivity measurements.
Scenario Analysis : The scenario analysis is the estimation of the interest, in a number of
scenarios i.e. potential prospects, of a single expenditure or community of investments. In the
corporate decision-making methods, most executives conduct situation research during order to
identify the right way to increase the income for the company. It also examines the worst
possible solution (worst-case scenario) and anticipates possible losses and organisational
issues. Investor & company executives will decide, by scenario review, how much chance they
take before spending or initiating a new venture. This is a way to learn of the possibilities
structurally. To order to help identify possible future issues in the scenario review, we should
take measures appropriate for eliminating or reducing their effects. For strategic planning
actions, simulations are especially necessary. By way of scenario evaluation management of
respective area may assess the future potential market occurrences and determine the financial
impact of alternate responses (Maxfield, 2019).
CONCLUSION
In the end of report, it is concluded that evaluation of the financial reports is also the
method of evaluating and examining the financial results of an entity to follow stronger
economic decisions. From the above calculation it is recommended that making investment in
order to but specific number of ferries would be beneficial for Water Pty Ltd that support in
resolving the issue related with transportation.
7

REFERENCES
Books and Journals:
Buchanan, J. M., 2014. Public finance in democratic process: Fiscal institutions and individual
choice. UNC Press Books.
Ehrhardt, M .C. and Brigham, E .F., 2016. Corporate finance: A focused approach. Cengage
learning.
Genest, C., Gendron, M. and Bourdeau-Brien, M., 2013. The advent of copulas in finance.
In Copulae and Multivariate Probability Distributions in Finance (pp. 13-22).
Routledge.
Maxfield, S., 2019. Governing capital: International finance and Mexican politics. Cornell
University Press.
Online
Capital Budgeting. 2020. [Online] Available Through:
<https://www.extension.iastate.edu/agdm/wholefarm/html/c5-240.html>.
8