Introduction
The main perspective of this assignment is to analyze the proposal of a hypothetical company. The name of the company is Recreation Facilities Limited (RFL) which operates a number of sports complexes. AKS is one of the sports complex located in the major city. There is a case has been given with the assignment in which different numerical things have been used. There is a need to come up with a report to the senior management in order to recommend them about to accept or reject the proposal of AKS by analyzing its effect over the net income and financial position of the company. If AKS, would be effective in terms of increasing the net income of the company, then it should be selected and vice versa,
It is required to analyze the effect of the given proposal on the net income of the company in particular. There are two different methods from which proposals could have been analyzed accordingly and both of them would have been used here. The names of the same are NPV and IRR. Before applying both of these tools, it is vital to analyze the cash flow of the proposal. There are four different segments of AKS, which particularly are Restaurant, Hair Salon, Health Shop and Massage Services. Mentioned below is the net income of the proposal in the first year of operation
In the first year of operations, the net income of generated by AKS is $ 24,592.
Some of the Assumptions
We are making out some assumptions for this particular analysis and some of the major assumptions are mentioned below
We are assuming that the total initial outlay of the proposal would be around $ 150,000, which has been assumed after computing the initial cost of the proposal
Apart from that, there is a hurdle rate also supposed, which is the combination of debt and equity, and we are assuming the WACC of the company would be 6.5%, as hurdle rate
The table Mentions below is the cash flow for the next five years of operations of AKS. We are assuming that the net income of the company would increase by 6% each year
There are two different analytical tools which have been taken into account for the same. According to the assumption, the WACC which has been supposed in this particular analysis is 6.5%. Mentioned below is the analysis of both NPV and IRR along with their pros and cons.
Net Present Value (NPV)
Net present value (NPV) is a financial tool that is used to evaluate any investment or project. It is a time series of both cash inflows and outflows, while it is typically measured as the divergence take place among the present value of cash inflows and the same with cash outflows. The primary aim of net present value is to ensure the analysis of any particular project akin to capital budgeting in order to determine the profitability margin on an investment. On the other hand, net present value is not equally effective in the context of future cash inflows reliability that would be generated from any project or investment. The prospective project would be considered as beneficial and supportive, if the NPV exhibits positive value. In contrary, the opposite turnout would probably be resulted in rejection of respective project due to a negative figure of cash flows. Some of the advantages and disadvantages are mentioned below:
NPV of the AKS proposal is mentioned below
The net present value of the AKS proposal is $ 59,544 which comes in the positive node, showing that the proposal would certainly be effective for the company in the long run, and it will increase the net income of the company. This particular proposal’s NPV is an indemnity that it will be positively effective over the net income of the company and the company should go with the same as it is effective as far as increasing the financial belongings is concerned.
Pros:
- AKS no longer deals with the utilities, hence the company has to incur low cost
- Revenue could be generated on regular interval
Disadvantages:
- They are unable to split, since the teenagers are moving in the building. This problem can be overcome to have foolproof security and restrict the movements of the teenagers in the building. Stringent action must have been taken
- Seniors use to pay only 40% which is not a good sign for AKS. AKS has to enable the senior management to contribute accordingly for the company’s future and restrict them to contribute high
Internal Rate of Return (IRR)
IRR is an acronym of internal rate of return that is committed to exercise in capital budgeting to quantify and make a comparison of profitability over investment. It can also be termed as ERR or DCFROR. The occurrence of internal rate of return is frequent in the project evaluation to make the net present value of both cash inflows and outflows to zero level from a prospective project. It is generally claimed that the superior is better in the case of both NPV as well as the discounted cash flow rate of return. Likewise, the superior the IRR of prospective project, the better chances to carry out the project.
The Internal Rate of Return (IRR) of AKS is mentioned below
The computed IRR in this particular provision is 18%, while the actual hurdle rate is 6.5%; therefore the IRR is higher than the hurdle rate. In this connection, this particular proposal should be accepted as it would positively affect over the net income of the company in particular.
Conclusion
The main perspective of this assignment is to analyze the proposal of a hypothetical company. The name of the company is Recreation Facilities Limited (RFL) which operates a number of sports complexes. AKS is the proposal which they intend to operate. From the analysis, it is found that the proposal would be effective for the company and it would affect positively over the financial position of the company and the company should go with the same.
Recommendations
As a report analysis, I would like to recommend the senior management that the proposal of AKS would be worthwhile for the company, as all of the evaluation tools like NPV and IRR is in the favor of the same, hence the proposal should be ACCEPTED
