3-4 Accounting Assignment wk8 in 24 hours

Module 3 Assignment:

Organizational Performance Analysis and Recommendations

Prepared by:

Date:

Walden University

WMBA 6050: Accounting for Management Decisions

Part 1: The Financial Performance Analysis

Introduction

Capital Budgeting is allocating resources for significant capital, or investment, expenditures. Capital Budgeting determines whether an organization's long-term assets, such as new machinery, replacement of machinery, new plants, new products, and research development projects, are worth pursuing. Organizations invest in capital projects to make a profit or increase the organization's value (Bierman,2020). Investing in a capital project is based on analyzing the project's expected financial performance. This performance is measured using various financial metrics, such as net present value, internal rate of return, and payback period. Capital Budgeting is essential for organizations because it allows them to make informed decisions about which projects to invest in. By carefully evaluating a project's expected financial performance, organizations can ensure that they are investing in projects that will generate the highest return on investment. The part of this project report provides the financial performance analysis of two target investment options: Air scrubbers and Furnace Fuel changers. The objective is to provide a numerical analysis of the two projects using project appraisal approaches, the NPV, IRR, PBP, and ARR.

Results of calculations of the NPV, PBP, IRR, and ARR

Air Scrubbers
Net Present Value using the Annuity Table to determine PV of cash flow
NPV = Initial Cost + (Net Annual Cash Flow × Factor)	Amount	Factor	Present Value
Initial investment	$(1,350,00)	1	$(1,350,000)
PV of Annual net cash flow for 15 years	$225,000	9.7122	$2,185,245
Net present value			$835,245
OR
Net Present Value Using Excel to determine PV cash flow
NPV = Initial Cost + PV of Cash Flow			Present Value
Initial investment			$ (1,350,000)
PV of Annual net cash flow for 15 years	=PV (rate, value1, [value2])	2,185,256
Net present value			$835,256
Payback Period = Initial Investment / Net Annual Cash Flow
			6
Internal Rate of Return
Using Annuity Table			14%
OR
Using Excel =IRR (M6:M21), use the IRR worksheet		14%
Average Rate of Return = Ave Net Income / Ave Book Value of investment
			20%

Furnace Fuel Change
Net Present Value using the Annuity Table to determine PV of cash flow
NPV = Initial Cost + (Net Annual Cash Flow × Factor)	Amount	Factor	Present Value
Initial investment	$(1,385,00)	1	$ (1,385,000)
PV of Annual net cash flow for 15 years	$315,000	9.7122	3,059,343
Net present value			$1,674,343
OR
Net Present Value Using Excel to determine PV cash flow
NPV = Initial Cost + PV of Cash Flow			Present Value
Initial investment			$(1,385,000)
PV of Annual net cash flow for 15 years	=PV (rate, value1, [value2])	$3,059,358
Net present value			$1,674,358
Payback Period = Initial Investment / Net Annual Cash Flow
			4.397
Internal Rate of Return
Using Annuity Table			22%
OR
Using Excel =IRR (M26:M41), use the IRR worksheet		22%
Average Rate of Return = Ave Net Income / Ave Book Value of investment
			21.7%

Analysis of the Results

The net present value is the present value of all future cash flows from a project minus the initial investment. The NPV is used in project appraisal to determine whether a project is worth undertaking. A positive NPV indicates that the project is worth undertaking, while a negative NPV indicates that the project is not worth undertaking. When an organization has two target projects and wants to select one, the decision rule when using the NPV method is to select a project with the highest NPV since it is more viable than a project with a lower Net Present Value (PRAVEEN,2020). In this context, Furnace fuel change has a higher NPV of $ 1,674,343 than the air scrubber, which has an NPV of $ 835,245; therefore, it should be implemented first before the Air scrubber.

The Internal Rate of Return (IRR) is a financial metric used to assess the profitability of an investment project. The IRR is the discount rate that makes an investment project's net present value (NPV) equal to zero. In other words, it is the rate of return that makes the NPV of the project equal to its initial investment. The IRR is used in project appraisal to compare the profitability of different investment projects. The higher the IRR, the more profitable the project. In this light of this analysis, the IRR of the Furnace Fuel changer is 22% and is higher than that of the Air scrubber, which is 14%, as the Furnace Fuel Changer should be selected over the Air Scrubber.

The payback period is the length of time it takes for an investment's benefits to equal its costs. The payback period is used in project appraisal to help decide whether or not to go ahead with a project. The payback period is expressed in years, representing the period the organization will take to recoup the initial cost of investment (Frost & Rooney,2021). Short periods are often considered better than long periods since projects are often affected by market risks; therefore, investors often prefer to recoup their initial capital. From the results provided above, Air Scrubber has a payback period of 6years, while Furnace Fuel Changer has a payback period of 4 years. The Furnace Fuel Changer will recoup the initial investment faster than the Air Scrubber.

The Average Rate of Return (ARR) is a financial metric used to evaluate the expected profitability of an investment project. The ARR is calculated by taking the average of the project's cash flows over its lifetime. The Average Rate of Return is used in project appraisal because it provides a quick and easy way to compare the relative profitability of different investment projects (PRAVEEN, 2020). The higher the ARR, the more profitable the project is expected to be. The Furnace Fuel Changer's average return rate is 21.7%, while Air Scrubber has an ARR of 20%. In this regard, the Furnace Fuel Changer will return more to the organization than the Air Scrubber.

Conclusion

All four investment appraisal techniques used in evaluating the viability of the Air Scrubber and Furnace Fuel Changer point to the fact that the Furnace Fuel Changer is more profitable than the Air scrubber. Therefore, the organization should select the Furnace Fuel changer over the Air scrubber.

References

Bierman, H. (2020). Capital budgeting.  Handbook of financial planning and control, pp. 77–89.

https://www.taylorfrancis.com/chapters/edit/10.4324/9781003062165-7/capital-budgeting-harold-bierman

Frost, G., & Rooney, J. (2021). Considerations of sustainability in capital budgeting decision-making.  Journal of Cleaner Production, p. 312, 127650.

https://www.sciencedirect.com/science/article/pii/S0959652621018680

PRAVEEN, B. (2020). Effective Capital Budgeting Decisions by Firms.  International Review of Business and Economics,  4(2), 41.

https://digitalcommons.du.edu/irbe/vol4/iss2/41/

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