SCIENCE DISCUSSION(NO PLAGIARISM, A++ WORK, QUALITY, ON TIME)
LAGNIAPPE
SPMT610FINALPROJECT.pptxNola babycakes Financial Project
Willie collins
Amu
27 November 2020
Introduction
This presentation will include the following:
Financial concepts.
Capital budget for the stadium
Operational budget for one year.
A five-year Return on Investment (ROI)
Capital structure of the project
Financial Concepts
Capital Budget– It is the process that a business uses to determine which fixed proposed fixed asset it should accept and which it should decline.
Operations budget- it comprises of revenues and expenses over a period of time which is typically a year.
Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. The operating budgets include the budgets for sales, manufacturing costs, selling expenses and general and administrative expenses (Lusardi 2019).
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Financial Concepts cont.’
Return on investment (ROI)- it is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.
Capital Structure- Corporate structure is the way in which the project finances its assets through some combination of equity, debt or hybrid securities.
To calculate ROI, the benefit/return of an investment is divided by the cost of the investment. The result is expressed as a percentage ratio. A goof ROI should be above 6%. Capital structure refers to the make up of the project’s capitalization. It is the composition of its liabilities. It is a combination of debt and equity used by an organization to finance its overall operations and growth (Lusardi 2019).
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Capital Budget
| Year | Cashflow | PVIF,10% | PVCIF |
| 1 | 186,000.00 | 0.9091 | 169,092.6 |
| 2 | 218,160.00 | 0.8264 | 180,287.4 |
| 3 | 194,735.00 | 0.7513 | 146,304.4 |
| 4 | 282,480.00 | 0.683 | 192,933.8 |
| 5 | 314,640.00 | 0.6209 | 195,360.0 |
| ∑PVCif '000' | 883,978.2 | ||
| PVCoF '000' | 126,000.0 | ||
| NET PRESENT VALUE | 757,978.2 |
The table above shows the project appraisal using the net present value criteria assuming a 10% cost of capital. It is evident that the cashflows are greater than the present values thereby making the investment a profitable option.
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Capital Budget Cont.’
The column chart represents the cashflows as well as the PVCIF for the project. The cashflows are represented by the green columns while the Present values are represented by the orange columns. This clearly shows that the project is visible as the cashflows generated from the operations will be higher than investing the money where it will earn a 10% interest.
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Graph Showing the NPV of the Project
cashflow 1 2 3 4 5 186000 218160 194735 282480 314640 PVCiF 1 2 3 4 5 169092.6 180287.424 146304.40549999999 192933.84000000003 195359.976 PVIF,10%, 1 2 3 4 5 0.90910000000000002 0.82640000000000002 0.75129999999999997 0.68300000000000005 0.6209 0000000000001
Year
Amounts
Capital Budget Cont.’
Investors will analyze the capital budgeting decision to ensure profit maximization. They will focus on increasing the prices of the tickets or reduce the costs of operating the arena.
In this case, the project should be accepted.
The project will be accepted since the rate of return for the project is less than the cost of capital. Some of the factors to consider before making a decision will include the availability of funds, the government policy, taxation policy among others (Fehrenbacher, Kaplan & Moulang 2020).
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Operational Budget
| Operational Budget | ||
| For the year Ended xx/xx/xx/ | ||
| Sales (tickets) | $600,000 | |
| other revenues generated from the stadium | $100,000 | |
| Total Revenues | $700,000 | |
| Direct Materials | $70,000 | |
| Direct Labour | $100,000 | |
| Overheads | $214,000 | |
| Prime Cost | $384,000 | |
| indirect costs | $130,000 | |
| Total Costs | $514,000 | |
| Profit | $186,000 |
The information provided above shows the operational budget for one year. This represents the amount of profit that the stadium is expected to earn in the first year of operations. Their main activity is selling of tickets which carries 85% of their revenues. The organization also has its expenses which have been classified as the prime costs and the indirect costs. The prime cost is the sum of all direct costs within the stadium. This means that any expense that involves the stadium such as paying the employees that work within the stadium, electricity, water and other utilities used in the stadium, will be expensed in the prime cost sections. The indirect costs include the administrative expenses which are essential for the business. Profit is generated from getting the difference between the total revenues and the total cost. If he revenues are greater than the expenses, the organization will earn a profit, as evidenced above. If the expenses are greater than the revenues the organization will suffer a loss (Amir 2020).
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Operational Budget cont.’
The graphical representation shows the proportion of revenues to expenses. The revenues are represented by the green column while the expenses are represented by the purple column. From the look of the graph, it is evident that the revenues exceed the costs.
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Revenues and Expenses
Total Revenues 2 700000 Total Costs 2 514000
Amounts
Operational Budget cont.’
The management will look at the following elements to ensure profitability:
The number of seats
Ticket price for the seats
Spectator attendance for all games
The organization has to ensure profitability (Amir 2020). This is by checking whether the stadium has enough seats to accommodate large crowds of people who will be attending different matches. They will also look at the market. There is a great spectator demand. The organization has to ensure that they understand the income of these persons. They have to ensure that tickets prices are fair enough for all persons. They will also look at tournaments that are in great demand. They will work. This will go hand in hand with the prices for the tournaments. In case of a tournament that is expected to have full capacity of spectators, the administration can adjust the price upwards to cater for the small revenues earned in small tournaments.
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Five Year- Return on Investment (ROI)
Return on Investment has the following benefits.
It is a better measure of profitability.
One can achieve goal congruence
It can be used for comparative analysis
It can be used for performance investment decision.
A ROI relates net income to investment made in a division giving a better measure of divisional profitability. All managers know that their performance will be judged in terms of how much they have utilized assets to earn profit. This will encourage them to make optimum use of assets. ROI also ensures congruence between the different departments and the firm. An increase in departmental ROI will bring improvement in overall ROI of the entire organization (Brockway et al. 2019).
ROI helps in making comparison between different business units in terms of profitability and asset utilization. It may be used for inter firm comparisons, provided that the firm whose results are being compared are of comparable size and of the same industry. ROI is significant in measuring the performance of investment division which focuses on earning maximum profit and making appropriate decisions regarding acquisition and disposal of capital assets (Brockway et al. 2019).
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Five Year- Return on Investment (ROI) Cont.’
| Year | Cashflows | Total Cashflow |
| 0 | -1,000,000 | -1,000,000 |
| 1 | 186,000.00 | -814,000 |
| 2 | 218,160.00 | -595,840 |
| 3 | 194,735.00 | -401,105 |
| 4 | 282,480.00 | -118,625 |
| 5 | 314,640.00 | 196,015 |
The organization used $1,000,000. future cashflows will be calculated by subtracting the projected expenses related to the facility from projected revenues from the facility.
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Five Year- Return on Investment (ROI) Cont.’
Number of years prior to full recovery= 4 years.
Unrecovered cost at start of the year 4= $118,625.
Cashflow during the full recovery year (Year 5)= $314,640
ROI= 4+ (118625/314640)= 4.377.
It will take 4.377 years to fully recover the initial $1,000,000 spent to construct the facility.
Payback period= Number of years prior to full recovery + (unrecovered cost at start of the year/cash flow during full recovery year.)
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Capital Structure of the project
Debt structure draws on the concept of debt which is a sum of cash a borrower must repay through periodic installments or in a lumpsum.
| Debt Structure | |
| Short term debt | $ 75,969 |
| Accounts payable | $ 20,620 |
| Long-term debt | $ 180,985 |
Debt structure provides a historical window into the organization’s liabilities, indicating to investors the maturity dates of corporate debts. The accounts payable are at the lowest amount possible. This is brought about by the credit purchases of inventory and services that the stadium will pay as per the agreed upon policy. The long term debt carries a huge proportion of the debt structure. The amount is obtained from the financing institutions such as bank loans with low interest rates. The stadium should work to reduce the amount of debt as the higher the debt structure, the higher the interest rates which is bad for business (Klasa et al. 2018).
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Capital Structure of the project Cont.’
Equity structure comprises of an organization’s common and preferred stock plus retained earnings. It is considered invested capital and it appears in the shareholder’s equity section of the balance sheet.
| Equity Structure | |
| Common Equity | 541,900 |
| Preferential Shares | 107,943 |
| Approved Reserves | 72,583 |
Capital Structure of the project Cont.’
A healthy capital structure reflects a low level of debt and high level of equity. This is a positive sign of investment quality.
The organization will prefer equity financing to debt financing.
the project requires external money to maintain their operations and invest in future growth. The main benefit of equity financing is that funds do not require to be repaid. Equity financing is a greater risk to the investor than debt financing is to the lender. As result, the cost of equity is always higher than the cost of debt (Klasa et al. 2018).
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References
Lusardi, A. (2019). Financial literacy and the need for financial education: evidence and implications. Swiss Journal of Economics and Statistics, 155(1), 1.
Fehrenbacher, D. D., Kaplan, S. E., & Moulang, C. (2020). The role of accountability in reducing the impact of affective reactions on capital budgeting decisions. Management Accounting Research, 47, 100650.
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References Cont.’
Amir, A. (2020). Public Policy Implementation: Study on Educational Budgeting of Palopo. Journal La Sociale, 1(1), 5-11.
Brockway, P. E., Owen, A., Brand-Correa, L. I., & Hardt, L. (2019). Estimation of global final-stage energy-return-on-investment for fossil fuels with comparison to renewable energy sources. Nature Energy, 4(7), 612-621.
References Cont.’
Klasa, S., Ortiz-Molina, H., Serfling, M., & Srinivasan, S. (2018). Protection of trade secrets and capital structure decisions. Journal of Financial Economics, 128(2), 266-286.
