MINI CASE
Calculation of the financial figures
For analysis of the project, the cash flow increment that is generated by the project must be calculated. Given that the networking money is built up before the sales, the first cash flow is dependent on this given cash outflow (Kirkpatrick, 2006). Therefore the first step is to calculate the sales. The total revenue is therefore given by the summation of the spot sales of the market and the price per every ton (Warburton, 2013). The yearly sales will be given as shown below.
The initial networking capital is calculated = 0.05*22,400,000=1,120,000
And therefore the cash flow is given as
OCF yearly calculation
Both the fifth and the sixth year have special interest since in the sixth year the charitable expenses are $6 and the fifth year has a land reclamation expense of $2.7
Findings
NWC cash flow
Let the salvage value be the last cash flow that is needed to be accounted for. The salvage value after tax of the equipment should therefore be used as the equipment cost that is required for the new project (Berkun, 2008). In another way, the equipment should be sold when the project is completed. Keeping these equipment could be regarded as the opportunity cost that is associated with the project (Ding et al, 2015).
Book equipment value = $85,000,000 – 12,155,000 – 20,825,000 – 14,875,000 – 10,625,000
Book equipment value = $26,520,000
Taxes on the sale of all the equipment = ($26,520,000 – 51,000,000)(.38) = –$9,302,400
Calculating the salvage value after tax
Salvage value after tax= $51,000,000 – 9,302,400
Salvage value after tax= $41,697,600
Analysis for capital budgeting for the entire project is therefore
Payback period is = 3 + $5,685,700/$68,981,300
Payback period is found to be 3.08 years
Profitability index = ($25,912,500/1.12 + $31,446,900/1.122 + $31,869,900/1.123
+ $68,981,300/1.124 – $1,736,000/1.125 – $4,650,000/1.126) / $94,915,000
Therefore
Profitability index = 1.174
AAR = [($14,027,500 + 10,846,900 + 16,364,900 + 13,878,000 – 1,736,000 – 4,650,000) / 6] /
[(85,000,000 + 72,845,000 + 52,020,000 + 37,145,000 + 26,520,000 + 0) / 7]
AAR = .1485
This is 14.85% in percentage
The IRR equation is then given by
–$94,915,000 + $25,912,500/(1 + IRR) + $31,446,900/(1 + IRR)2 + $31,869,900/(1 + IRR)3
+ $68,981,300/(1 + IRR)4 – $1,736,000/(1 + IRR)5 – $4,650,000/(1 + IRR)=0
Therefore the IRR for the given project is
IRR = 19.01%, –74.64%
MIRR = 12.94%
NPV = –$94,915,000 + $25,912,500/1.12 + $31,446,900/1.122 + $31,869,900/1.123+ $68,981,300/1.124 – $1,736,000/1.125 – $4,650,000/1.126
NPV = $16,472,777.67
Conclusion on feasibility of the project
Since the NPV is a positive value, the company should therefore accept the entire project. Taking up this project will allow the company to cover its entire anticipated costs while remaining with favorable profits (Dayananda, 2002). This is because a net present value that is positive bears profitability for any company that takes up the given project. The feasibility of the project is also confirmed from its payback period, which is only 3 years. This indicates that by taking the project the company would have recovered all the money it invested by the third years; hence, there is lower chances for failure. The project also shows a profitability index of more than 1 thereby showing that the project is more profitable and feasible (Horine, 2012).
References
Kirkpatrick, C., & In Weiss, J. (2006). Cost-benefit analysis and project appraisal in developing countries. Cheltenham: Edward Elgar Publ.
Dayananda, D. (2002). Capital budgeting: Financial appraisal of investment projects.
Cambridge u.a. Cambridge Univ. Press.
Warburton, R. (2013). Art and science of project management. Place of publication not identified: Rw Press.
Berkun, S. (2008). Making things happen: Mastering project management. Sebastopol, Calif: O'Reilly Media.
Ding, R., Zho, J., Tang, G., Wei, K., Zhao, X., & Li, S. (2015). Key project management based on effective project thinking.
Horine, G. (2012). Absolute beginner's guide to project management. Indianapolis, Ind: Que.
