Comprehensive Learning Assessment 1

PROJECT ANALYSIS 1

PROJECT ANALYSIS 2

Project

Name

University

Subject

Prof

Date

Project Analysis

Investing money at the right place is very important in order to make more money. A different number of factors should be taken into consideration before investing our valuable money and resources into any project or source. In this paper we will be analyzing and calculating these factors such as Payback Period, Initial Rate of Return (IRR), Modified Internal Rate of Return (MIRR), Net Present Value (NPV) and Profitability index. Later, we will also be performance an exclusive financial analysis for Pristine Urban-Tech Zither Inc.

Payback Period

Payback Period of a project determines how long will it take for the project to return the initial invested money towards the project (Ross, 2018). In order to calculate Payback period of a project we should know the amount of money that is going to be invested, the amount of money that will be received periodically and the number of years the project will last.

Now let’s consider an example, we will be investing $5,000,000 for project A and Project B respectively. The cash inflow for Project A will be $1,500,000 from period 1 to period 6, $2,000,000 and $0 for period 7, 8 respectively. Similarly, Project B’s cash inflow will be $1,250,000 from period 1 to period 7, and $1,600,000 for period 8. Now if we consider the payback period for both the projects, we know in 4 periods we will get our investment amount back but in order to calculate exact number of years we will divide invested amount by cash inflows (4 periods).

Formula: Payback = invested amount / cash inflow

We get, Project A = 3.33 and Project B = 4.00. This explains that we get back our initial invested amount from Project A in 3.3 years and from Project B in 4 years. Shorted payback period is better, hence we would go with Project A.

Initial Rate of Return (IRR)

In Initial rate of return (IRR), we calculate the interest rate at which the Net Present Value (NPV) is 0 (Ross, 2018). IRR is considered to be return on the discounted rate, which if greater than the initial rate, the project is considered to be profitable.

Let’s consider an example, we know the initial invested amount and the cash inflows for both the projects. The initial Rate of return is 15%.

Formula: NPV = PV + FV/1 + R.

While calculating IRR we set NPV value to be 0, and R is considered as return on the discounted rate which we need to calculate. After considering and calculating all the above information, we get IRR for Project A as 23.80% and for Project B as 19.19%. Like I mentioned earlier, greater the IRR, bigger the Profit. Hence, Project A is considered as more feasible to do investment.

Modified Internal Rate of Return (MIRR)

In order to determine economic sustainability of mutually exclusive projects we make changes towards our initially calculated Internal Rate of Return (Ross, 2018). Hence the name Modified IRR. Similar to IRR, if the MIRR is greater than that of our initial rate on return, the project is considered to be profitable.

Using the above formula, we get the value of MIRR for Project A as 19.20% and Project B as 16.97%. And the greater percentage value is considered to be more profitable, hence Project A is more profitable and feasible compared to Project B.

Net Present Value (NPV)

Net present value is nothing but the value of money with respect to today (Ross, 2018). NPV is calculated in order to determine future value money to its current value. It helps the investors understand their gaining’s from the project after it has been completed.

Formula: NPV = PV – FV/(1+i) t

Where,

PV = Present value

FV = Future value

i = discounted rate

t = number of years

We know the Present value, Future Value, discounted rate and number of years for both the projects, Project A and Project B. After calculating NPV for both the projects we get $6,428,954 for Project A and $5,723,654 for Project B. Again, Project A is considered to be profitable as the NPV dollar amount is greater than that of Project B.

Profitability Index (PI)

Profitability Index (PI) is the division of present cash value of the future cash divided by the invested amount (Ross, 2018). When the Profitability index is higher than one, then the project is said to make profits.

Formula: PI = Cash flow / Initial investment

Here, we know our cash inflow values along with our initial investment value for both the projects. Hence, we get 1.28% and 1.14% after calculation for project A and project B respectively. Since, both the projects have PI value more than 1, we choose the project with better PI value. i.e. Project A.

Considering all the factors above, it is safe to say that the Project A is more profitable than Project B, and hence, should be worked on.

Pristine Urban-Tech Zither

Zither is a fast-growing company who had invested in buying a land for their toxic waste three years ago. However, they hired a third-party company to take care of their toxic waste recently. Now, Zither is considering to sell their for 2.3 millions after tax, which if sold after 4 years can help them earn 2.4 millions instead. Assuming being a consultant with Zither we will be analyzing following factors considering the report generated by the marketing team.

Initial Cash Flows

According to the marketing report we have couple of initial investments made towards this project, one being working capital of $125,000 and the price for scrapping equipment’s which is $350,000. Adding both the initial cash flows will give us total initial cash flow which is $475,000.

Sunk Cost

Sunk cost is nothing but the cost that has already been paid off and cannot be retrieved back. These costs should not be considered in making any of the decisions for the future cash inflow as these sunk costs can’t be recovered.

In our project with Zither, the only sunk cost we had was $125,000 which is the payment done to the marketing team in order to generate report. Like I mentioned, this sunk cost wouldn’t be counted towards our project cost as it is a non-retrievable payment.

Annual Operating Cashflows

Annual operating cashflows are calculated at the very end of each year by adding Net Income, Depreciation and Working Capital Changes for each year. According to the marketing report, Net income to be earned by Zither in this project would be $442,339, $477,710, $1,476,623 and 1,340,378 for the year 1,2, 3 and 4 respectively. Hence, the total Net Income for next 4 years would be $3,737,050. Depreciation amount for next 4 years would be $1,166,550, $1,555,750, $518,350 and $259,350 from year 1 to 4 respectively. Hence, the total depreciation amount for 4 years would be $3,150,000. The only change in working capital we have is for year 4 which is $125,000 and hence the total change in working capital throughout the project’s lifecycle is $125,000. Once we have total net income, depreciation and change in working capital, we simply add them to get annual operating cashflows as $6,887,050.

Terminal Cash Flows

Terminal Cash flows are nothing but an addition of after-tax salvage value with the annual operating cashflows. Once we calculate all the cash in-flows and add them with taxable amount we get the total as terminal cash flow.

Formula: Terminal Cash Flow = Annual Operating Cashflow + After tax value

NPV and IRR

We already know what Net Profit Value and IRR is, along with its formula. Now in order to apply the above formula, we first need to find out the cash flow value for all four years. After calculating we get cash flows as, $1,423.796, $1,592,497, $1,382,616 and $1,057,808 from year 1 to 4 respectively. Lastly, we add them together and get $5,456,717 and later calculate NPV with respect to rate of return as 13% and get NPV as $1,831,717 which is greater than the invested amount. Hence, it’s would be a good investment towards this project. While calculating IRR, we need to know the total of the entire cashflow, hence we add all the cash flows and get $3,625,000 and get our IRR as 35.22%, which is way better then our assumed IRR of 7.71%. And hence, again, we know that this project can be profitable.

Impact on Market Price

We know that Zither is a publicly traded company, and we expect it to have a positive impact on the market. All the calculations done above show that the project is going to be profitable and it is very feasible to invest in this project. With the growing market more people will be attracted and will result in growth of the company with respect to its stocks. Hence, it would be fair to say that the company will impact the stock market.

References

Bizon, E. (2007, Sep 16). Much money to be made: [final edition]. Edmonton Journal Retrieved from https://www.proquest.com/docview/253458708?accountid=158986

Heinzl, J. (2010). Dividend payback period: A defensive tool.

Investopedia stock analysis: What's a sunk cost? (2015). . Chatham: Newstex. Retrieved from https://www.proquest.com/docview/1655003725?accountid=158986

Kulakov, N. Y., & Kulakova, A. N. (2014). Is the MIRR a suitable indicator for projects with multiple outflows? IIE Annual Conference.Proceedings, , 166-173. Retrieved from https://www.proquest.com/docview/1622299319?accountid=158986

McBeth, K. H. (1993). Forecasting operating cash flow: Evidence on the comparative predictive abilities of net income and operating cash flow from actual cash flow data. The Mid - Atlantic Journal of Business, 29(2), 173. Retrieved from https://www.proquest.com/docview/203726531?accountid=158986

Ross, S. A., Westerfield, R. W., Jordan, R. D., (2018). Fundamentals of corporate finance (12 th ed.). McGraw-Hill 

Sivasankaran, N., & Srivastava, V. (2012, Oct 13). Understanding discounted cash flows. Businessline Retrieved from https://www.proquest.com/docview/1323114417?accountid=158986