CLA 1 Paper - Financial Management

1

11

Comprehensive Learning Assessment 1

Miku Anraku Comment by amygreenlee: Hi! Thanks so much for sending this over! I will be putting my feedback into the comments and also making suggestive edits to the paper. While I can definitely help look at grammar, I am not able to help with any of the financial calculations, as this is not an area I know anything about. This might be something a content specialist at the Academic Resource Center can help you out with though!

Westcliff University

BUS 550: Financial Management

Dr. John Knight

July 21, 2021

Comprehensive Learning Assessment 1

A pProject appraisal entails assessing the project at hand to determine its viability. A businessman manager should perform asome mathematical test on a project or proposal to determine its profitability before funding the project. This e assessment is normally done using a decision making technique and comparing the results with the results offrom other possibilities (Bowerman et al., 2016). The techniques used for a project appraisal are discussed under capital budgeting, where the best projects are chosen. CThe capital budgeting considers all the costs from the scratch to the very end and the revenues collected from the project. To determine the viability of the following project, we shall use the capital budgeting techniquess as follows. Comment by amygreenlee: “from beginning to end” ?

Project A

NPV

A x 1-1/(1+r)n/r

PV annuity 1500, 000x 3.7845 =5,676,750

Add PV single amount 2000,000 x 0.3759 = 751,800

6,428,550

Less capital outlay ( 5000,000)

NPV 1,428,550

IRR

NPV at a higher discounting rate 36%

PV annuity 1500,000 x 2.3388 =3508167

PV single amount 2000,000 x 0.1162 = 232400

Less Io (5000,000)

NPV -1,259,433

IRR = LDR + (NPV LDR) X (HDR-LDR)

NPV LDR- –NPV HDR

0.15+1428,550/1428,550—1,259,433 x(0.36-0.15)

IRR = 26.16%

MIRR

= CIFt/PV (1/n)-1

10600,000(1+0.15)=12,190,000

-5000000(1+0.15) =-5,750,000

12,190,000/(-5750,000)1/7-1

MIRR= 2.47%

PI

NPV/Io

1,428,550/5000, 000 =0.29

Project B

NPV

PV of annuity 1,250,000 x 4.1604 = 5,200,500

PV of single amount 1,600,000 x 0.3269 = 523,040

5,723,540

Less Io (5,000,000)

NPV 723,540

IRR

Negative NPV from higher discounting rate 24%

PV annuity 1250,000 x 3.2423 =402875

PV single amount 1600,000 x 0.1789 =286240

Total PV 4339115

Less Io -5000000

NPV -660885

IRR = LDR + (NPV LDR) x(HDR-LDR)

(NPV LDR -–NPV HDR)

=0.15+ 723550/(723550—660885) x (0.24-0.15)

IRR =19.70%

MIRR

10,350,000(1+0.15) = 11,902,500

-5000, 000(1+0.15) = -5750,000

11,902,500/(-5750,00)1/8-1

2.366%

PI

NPV/Io

723,540/5000,000 =0.1447

Decision Making under NPV

The NPV for Project A is more than that of Project B, thus the right project under thisese criteria is project A (Clayman et al., 2012). A higher NPV indicates that the project is more profitable, thus thus project A is more profitable than project B.

Decision Making under IRR

Project A has a higher IRR than project B , whichthis means project A is to be preferred (Farag & Johan, 2021). The IRR for both projects are higher than required rate of return, thus both projects are profitable., Hhowever, project A is more profitable, as its IRR is above both the IRR for project B and the RRR of the company.

Decision Making under MIRR

The MIRR for both projects are below the RRR for the company, thus they should be rejected (Richard T O'Connell et al., 2018). The best MIRR should be above the RRR for the company.

Decision Making under PI

A profitable project should have a Profitability index above 1 (Vernimmen et al., 2017). Both projects A and B have a PI below 1, thus they should be dropoped.

Part Ttwo Comment by amygreenlee: Was there a “Part One” heading?

Initial cost

The initial cost of the project Zither is the total of the market survey, the machine for the production, and the land cost (Taillard, 2012,). All costs that are incurred to get the production of Zzither moving are the initial cost for the project, i.e. the total capital.

The sunk cost

Sunk cost is the amounts of money spentd on a project that cannot be recovered. It includes the cost of land, the research cost, and the machinery cost (Taillard, 2012,). In many cases these costs are not considered for decision making. These costs remain to have been spent regardless of the decision made. Comment by amygreenlee: Maybe just “remain spent” ?

Determining operating cash flows

To determine the annual revenues, multiply the total units produced by the selling price, and then deduct the variable cost, the fixed cost, and the depreciation. The figure arrived at will be subjected to tax, and then the depreciation amount will be added back (Vernimmen et al., 2017). The figure arrived at will be the operating cash flows.

Determining terminal cash flows

To determine the terminal cash flows, add all the incremental cash flows then deduct all the expenses and i.e. depreciation and tax (Vernimmen et al., 2017). This is the amount the company will get gets after disposing all its assets. Comment by amygreenlee: Did you mean “and” or “i.e.” here?

Workings

Determine Cash Outlay Comment by amygreenlee: Just a note that some of your headings use Title Casing and some use Sentence Casing. Most headings in APA use Title Casing, so you might want to go through and check on this throughout the paper for consistency. Here is a resource on headings as well: Headings

Cost Amt in $

Survey cost 125,000

Machine 3.500,000

Land 2,100,000

5725,000

Determine the Cash Flows

Year	Units	CPU	Total
1	3600	750	2700000
2	4300	750	3225000
3	5200	750	3900000
4	3900	750	2925000

Variable cost

Year	Revenue	15%
1	2700000	405000
2	3225000	483750
3	3900000	585000
4	2925000	438750

Depreciation

3,500,000/3= 1,166,667

Determining Cash Flows

Year	1	2	3	4
Revenues	2700000	3225000	3900000	2925000
Less variable cost Less fixed cost Less depreciation	(405000) (415,000) (1,166,667)	(483750) (415000) (1,166,667)	(585000) (415000) (1,166,667)	(438750) (415000) (1,166,667)
Total revenue before tax Less tax	713333 (256799.9)	1159583 (417449.9)	1733333 (623999.9)	904583 (325649.9)
Revenues after tax Add depreciation	456533.1 1,166,667	742133.1 1,166,667	1109333 1,166,667	578933.1 1,166,667
Net cash flows	1623200.1	1908800.1	2276000.1	1745600.1

Terminal Cash Flows

Equipment $

Revenue 350,000

Less NBV 0______

Net revenue before tax 350,000

Tax (133,000)

Terminal cash flow after tax 217,000

Land 2,400,000

Less initial cost (2,100,000)

300,000

NPV

$	Discounting at13%	$
1623200	0.8849	1436369.68
1908800	0.7831	1494781
2276000	0.693	1577268
1745600	0.6133	1070576.48
217000	0.6133	133086.1
300000	0.6133	183,990
	PV	5896071.54
	Less Io	-5725000
	NPV	171071.54

IRR

NPV of lower discounting rate of20 %

$	20%	$
1623200	0.8333	1352612.56
1908800	0.6944	1325470.72
2276000	0.5787	1317121.2
1745600	0.4823	841902.88
217,000	0.4823	104659.1
300,000	0.4823	144690
		5086456.46
less initial capital	-5,725,000
	NPV	-638,544

IRR = LDR + (NPV LDR) x (HDR_LDR)

(NPV LDR - - NPVHDR)

0.13 + 171071.54___________(0.2-0.13)

(171071.54 - -638,544)

IRR =14%

Decision

The project is acceptable since the IRR is more than the required rate of return and the NPV is positive (Taillard, 2012,). When the IRR is above the required rate of return it means the project is profitable. In our case, the project is profitable and the NPV is showing profits.

A company with good returns will tread well in the capital market. Our company is making a profits according to the analysis; this means that many people will be interested in the company’s stock, increasing itsthe demand in the market (Taillard, 2012,). This will eventually result in an increase in price for the stock. Comment by amygreenlee: “do well” ?

Conclusion

From the above analysis, it is easy to tell the best project to invest in. The capital appraisal will ensure that the investor chooses the best investment, thereby avoiding losses in terms of money and time (Taillard, 2012,). It is therefore important for all investors to undertake this type ofese analysis before injecting money to any project. Comment by amygreenlee: “investing money into” ?

References

Bowerman, B., O'Connell, R., & Murphree, E. (2016). Business statistics in practice: Using data, modeling, and analytics. McGraw-Hill Education.

Clayman, M. R., Fridson, M. S., & Troughton, G. H. (2012). Corporate finance: A practical approach. John Wiley & Sons.

Farag, H., & Johan, S. (2021). How alternative finance informs central themes in corporate finance. Journal of Corporate Finance, 67, 101879. https://doi.org/10.1016/j.jcorpfin.2020.101879

Richard T O'Connell, P., Bowerman, B. L., & Emilly S., & Murphree, P. (2018). Loose leaf for business statistics in practice. McGraw-Hill Education. Comment by amygreenlee: Is this supposed to be: Richard, T., ?

Taillard, M. (2012). Corporate finance for dummies. John Wiley & Sons.

Vernimmen, P., Quiry, P., Dallocchio, M., Fur, Y. L., & Salvi, A. (2017). Corporate finance: Theory and practice. John Wiley & Sons.