CLA 2 Paper & PPT - Financial Management

Running head: PROJECT APPRAISAL 1

PROJECT APPRAISAL 15

Project appraisal

Student’s name

Professor’s name

Date

A Project appraisal entails assessing the project at hand to determine its viability. A business manager should perform a mathematical test on a project or proposal to determine its profitability before funding the project. This assessment is normally done using a decision making technique and comparing the results with the results of other possibilities (Bowerman et al., 2016). The techniques used for a project appraisal are discussed under capital budgeting, where the best projects are chosen. 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 capital budgeting technique.

a) Payback Period

year	cash flows
0	-5000000
1	1500000
2	1500000
3	1500000
4	1500000
5	1500000
6	1500000
7	2000000
	5000000
	4500000
	500000
	3
Payback period	3.1

The project will take 3 years and 1 month to recoup the money injected in the project

NPV project A

The NPV is positive therefore accept the project

The IRR is 23.8% therefore accept the project.

PI

The profitability index is above 1 therefore the project should accepted

PROJECT B

a). Payback Period

year	cash flows
0	-5000000
1	1250000
2	1250000
3	1250000
4	1250000
5	1250000
6	1250000
7	1250000
8	1600000
	5000000
	3750000
	1250000
	3
Payback period	3.78125

The project will take 3 years and 7months to recoup the cash out lay

a) NPV

The NPV is positive thus accept the project

c). IRR

The IRR is positive therefore accept the project.

d). MIRR

The MIRR is more than RRR of the company thus accept the project.

e). PI

The profitability index is more than 1 thus accepts the project

Decision Making under NPV

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

Decision Making under IRR

Project A has a higher IRR of 23% than project B which has 17% , which 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. However, 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 above the RRR for the company thus they should be accepted (Richard T O'Connell et al., 2018). However, Project A has a higher MIRR of 19.2% as compared to 17% of Project B thus project A is more preferable. 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 that is above 1, thus these projects are profitable. However, the PI for project A is 1.28 more than that of Project B which 1.14, this means project A is better thus accept project A.

Decision Making under payback period

Project A is to e preferred since the capital out lay will be recouped in years and one month while as project B will take 3 year and 7 months (Vernimmen et al., 2017). The shorter the duration the more better the project becomes.

Part Two

a). Initial cost

The initial cost of the project Zither is the total of market the survey, the cost of production machine, and the land cost (Taillard, 2012). All those cost that are incurred to get the production of Zither moving are the initial cost for the project, i.e. the total capital. The total cost for the project is $5725, 000.

b). The Sunk Cost

Sunk cost is the amount of money spent on a project that cannot be recovered. It includes the cost of land $2,100,000, the research cost, of $125,000 and the machinery cost $3,500,000 (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. The total sunk cost for our project is $5725, 000

c). 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. As shown in table three of the workings

d). 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 after disposing all its assets. As shown in working 4

Workings

Determine cash outlay

Cost Amt in $

Survey cost 125,000

Machine 3.500,000

Land 2,100,000

5725,000

Determine the cash flows

Table One

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

Variable cost

Table two

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

Table three

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

Working 4

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

Less tax (114,000)

186,000

di). NPV

dii).IRR

IRR=13.5%

diii). Decision

The project is acceptable since the IRR of 13.5% is more than the required rate of return and the NPV of 61440 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.

e) Implication in the Stock Market

A company with good returns will tread well in the capital market. Our company is making a profit according to the analysis; this means that many people will be interested in the company’s stock increasing its demand in the market (Taillard, 2012,). This will eventually result in an increase in price for the stock. According to the analysis all the parameters are favorable thus very attractive to potential investors

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 of analysis before injecting money to any project.

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.

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.