Risk Methodologies
TaraD30
TaraDeanunit5IP2.pptxRisk Methodologies
CTU
Tara Dean
4/2/2022
IRR and NPV
IRR = 35.165%
NPV = -$33,100,768.08
The project should not be accepted.
Tara, your spreadsheet is incorrect/partial credit 30p
NPV $ (996,642.68) PV factor/ IRR 9.08%
2
Financial information
More data was needed to make the decision.
NPV and IRR do not highlight the impact of the project on the society.
NPV and IRR do not give information on sustainability potential of the project (Magni & Marchioni, 2020).
Additional data can enhance precision in ability to make decisions.
The financial information provided in the case was not sufficient to make a solid decision on what the company should do. This is because the data provided only focuses on the expected income and whether the income hits the target. There are various types of financial information that are necessary in making better decisions. These are meant to correct the few sources of inefficiency of NPV and IRR as metrics of assessing suitability of the project./incorrect/0p
Financial information prove was sufficient to make solid decisions/
3
Additional information needed
Information 1: Role of the project in value creation.
Impact of the project on sustainability.
Cost of not undertaking the project
Information needed in making sound decisions. For a project such as coffee packaging, the value or benefits may be more than just the financial benefits. This may include a description and proposal oh how the investment project is enhancing value creation within the company. Also, there has to be information describing the impact of the project on sustainability as well as the loss the company is likely to incur if the project is not done./ your NPV and the IRR is incorrect your analysis is also incorrect. I went over this exercise in the live chat./0p
4
Determinant
The net profit figure was the main determinant.
Reflects the financial value of the project.
Determines the time taken to realize the initial capital outlay.
Determines whether the project maximizes the company’s profitability (Marchioni & Magni, 2018).
The main determinant that was used in making the decision in the case was the net profit. Net profit is realized after all the expenses and cash outflows are deducted from the gross profit generated from the project. The reason as to why this figure was used is because it reflects the financial value of the project. It determines what income the company will generate as a result of its presence. With a clear image of the impact of the net profit, it is easier to determine whether the company can maximize profitability.
Instructor comments
You cannot use net profit/ you need to use the cash flow and compute the NVP and the IRR, which you stated incorrectly/0p
5
Application
Applicable in capital rationing.
Applicable in setting organizational short term goals.
Applicable in financial risk assessment.
The financial information on NPV and IRR and using financial data to make decisions can be applied in other areas and situations. One of such situation is in capital rationing where the company has scarce resources and is in need of implementing a variety of projects. The information can also be applied in setting goals and targets for organization on a short-term basis. In addition, the information may be used in determining financial risks in projects such as determining contingent costs in project management./ok10p
6
Risk methodologies
Transfer: in case of stand-alone risk.
Avoid: in case of project specific risk.
Mitigation strategy: in case of industry-specific risk (Chicktay & Barnard, 2018).
In capital rationing, risk strategies are based on the type of risk and the potential impact it has on the company or organization. One of the strategies that can be used is transfer where the company shifts the liability associated with a specific asset in the project to a third party such as insurance. Another strategy is avoiding the risk which entails ensuring the company does not incur the loss by preventing the risk from occurring in the first place. The third strategy is mitigation which refers to reduction of the impact of the risk in case it occurs. This is appropriate for risks that are not specific with the industry. Incorrect/0p
Instructors comment:
Three methods can be used to estimate Capital budgeting in a large, publicly-traded for-profit business:
Capital Asset Pricing Model (CAPM)/The equation used is the Security Market Line (SML).
Discounted cash flow (DCF) model
Debt cost plus risk premium model
7
Reference
Marchioni, A., & Magni, C. A. (2018). Investment decisions and sensitivity analysis: NPV-consistency of rates of return. European Journal of Operational Research, 268(1), 361-372.
Magni, C. A., & Marchioni, A. (2020). Average rates of return, working capital, and NPV-consistency in project appraisal: A sensitivity analysis approach. International Journal of Production Economics, 229, 107769.
Chicktay, W., & Barnard, B. (2018). Venture capital process: opportunity selection, monitoring, capital rationing, and deal flow. Monitoring, Capital Rationing, and Deal Flow (September 1, 2018).
Rubric
Unit 5 Rubric 200 possible point
Points earned =50
Total= =50
NPV(996,642.68)$
PV factor
IRR9.08%
ParticularAmount
Sales27000000
Less: cost of sales50% of 27000000-13500000
13500000
Less: Expenses
Depreciation40000000/58000000
SGA expenses10% of 270000002700000-10700000
Earning before tax2800000
Tax charge35 % of 2800000-980000
Net Profit1820000
NPV - IRR
| Revenue | $ 27,000,000.00 | $ 27,000,000.00 | $ 27,000,000.00 | $ 27,000,000.00 | $ 27,000,000.00 | |
| FIN 615 | COS | $ (13,500,000.00) | $ (13,500,000.00) | $ (13,500,000.00) | $ (13,500,000.00) | $ (13,500,000.00) |
| NPV and IRR calculations | Depreciation | $ (7,000,000.00) | $ (7,000,000.00) | $ (7,000,000.00) | $ (7,000,000.00) | $ (7,000,000.00) |
| SG&A | $ (2,700,000.00) | $ (2,700,000.00) | $ (2,700,000.00) | $ (2,700,000.00) | $ (2,700,000.00) | |
| Operating Inc | $ 3,800,000.00 | $ 3,800,000.00 | $ 3,800,000.00 | $ 3,800,000.00 | $ 3,800,000.00 | |
| Taxes | $ (1,330,000.00) | $ (1,330,000.00) | $ (1,330,000.00) | $ (1,330,000.00) | $ (1,330,000.00) | |
| Net Income | $ 2,470,000.00 | $ 2,470,000.00 | $ 2,470,000.00 | $ 2,470,000.00 | $ 2,470,000.00 | |
| Add: Depreciation | $ 7,000,000.00 | $ 7,000,000.00 | $ 7,000,000.00 | $ 7,000,000.00 | $ 7,000,000.00 | |
| Add: Recovery NWC | $ 5,000,000.00 | |||||
| Total Cash Flow | $ 9,470,000.00 | $ 9,470,000.00 | $ 9,470,000.00 | $ 9,470,000.00 | $ 14,470,000.00 | |
| Cost of Capital | 10.00% | |||||
| Time/yr | 0 | 1 | 2 | 3 | 4 | 5 |
| Cash flow Input here | $ (40,000,000.00) | $ 9,470,000.00 | $ 9,470,000.00 | $ 9,470,000.00 | $ 9,470,000.00 | $ 14,470,000.00 |
| Discounted CF | -40000000 | 8609090.90909091 | 7826446.28099173 | 7114951.16453794 | 6468137.42230722 | 8984731.54466597 |
| NPV | $ (996,642.68) | =cf1/((1+n)^1) | =cf2/((1+n)^2) | =cf3/((1+n)^3) | =cf4/((1+n)^4) | =cf5/((1+n)^5) |
| PV factor | 0.9090909091 | 0.826446281 | 0.7513148009 | 0.6830134554 | 0.6209213231 | |
| IRR | 9.08% |
Sheet3
Unit 5 Rubric 200 possible point
Points earned =50
Task
requirements
10
Demonstration
and
application of
knowledge
30
Academic
writing and
format
10
Total= =50
