Report to the CEO
Financial management is a broad filed; in which there are number of concepts are buried. Among number of concepts, the name of capital budgeting and investment appraisal is one of them, which has its own significance and importance. The financial statement of an organization is the end document of a company which analyzes and presents different financial information accordingly. Basically a financial statement is comprises on different things, which predominantly are, income statement, balance sheet, cash flow and statement of changes in equity. In this particular assignment, which is all about capital budget and investment appraisal technique, it is required to recommend the CEO of the company regarding the undertaking of the project or not.
In order to capture the views of the CEO, and to apprise him accordingly, we have computed the cash inflow of the project as well, which is important to analyze before taking any sort of economic decision in total. Revenue has been calculated on the basis of the information provided, including variable and fixed cost as well. The cash flow for the next 10 years is mentioned duly under the appendices-1 and it could be seen clearly from the table that the cash inflow of the company comes in the positive figure. An increment rate of 12.17% and 12.33% has been envisaged in the starting of two years of the project, which increased each year with a regular percentage. Positive increment in the cash flow of the company is evidence that the project has the tendency to increase the financial belongings of the company as a whole, as it may increase the synergy based effects as well. Having a positive cash flow is an indication that the project will bring economic based change and sustainability towards the company as a whole. We would like to recommend the CEO, to critically analyze this thing that the project, which is smart enough to increase the financial belongings of the company, should be taken into account as well comprehensively.
Capital WACC of the Project
Weighted Average Cost of Capital (WACC) is an important measure to analyze the effectiveness of a project. WACC, which also known as hurdle rate is a rate which is used for analyzing the investment appraisal of a project in total
Executive Report
It is important for the organizations to increase the financial belongings accordingly. There are number of things which come under the ambit of this thing. With the help of effective tools of investment appraisal, the effectiveness of a project could be analyzed accordingly. The computation of two effective investment appraisal techniques, which are Net Present Value (NPV) and Internal Rate of Return (IRR) are mentioned below in the appendices. From the computation of the NPV mentioned in the appendix-2, it is found that the NPV of the project is in the positive node. The NPV of the project is $ 44,439,634 and the company should undertake the project as it will certainly bring positive economic prosperity for the company.
The next investment appraisal technique which has been used in this particular analysis is Internal Rate of Return (IRR), which is yet another important tool, used for the analysis of the same. The computed IRR of the project is 19%, while the actual hurdle rate of the project is 3.06%, which is higher than the actual WACC, which is showing that this particular project would be extremely effective for the company and the CEO and upper management of the company has to undertake this project because of its effective financial and non financial potential in total.
