Year |
Cash Inflows |
Cash Outflows |
Net Cash Flows |
Pvf @12.50% |
Present Value Of Cashflows |
0 |
$ – |
$ 46,00,000.00 |
$ -46,00,000.00 |
1.000 |
$ -46,00,000.00 |
1 |
$ 16,00,000.00 |
$ 6,00,000.00 |
$ 10,00,000.00 |
0.889 |
$ 8,88,888.89 |
2 |
$ 20,00,000.00 |
$ 5,00,000.00 |
$ 15,00,000.00 |
0.790 |
$ 11,85,185.19 |
3 |
$ 24,00,000.00 |
$ 6,00,000.00 |
$ 18,00,000.00 |
0.702 |
$ 12,64,197.53 |
4 |
$ 22,00,000.00 |
$ 8,00,000.00 |
$ 14,00,000.00 |
0.624 |
$ 8,74,013.11 |
5 |
$ 18,00,000.00 |
$ 10,00,000.00 |
$ 8,00,000.00 |
0.555 |
$ 4,43,943.17 |
NPV |
|
|
|
|
$ 56,227.88 |
Years |
Cash Inflows |
Cash Outflows |
Net Cash Flows |
Pvf |
Present Values |
0 |
$ – |
$ 40,00,000.00 |
$ -40,00,000.00 |
1.000 |
$ -40,00,000.00 |
1 |
$ 14,00,000.00 |
$ 6,00,000.00 |
$ 8,00,000.00 |
0.889 |
$ 7,11,111.11 |
2 |
$ 18,00,000.00 |
$ 5,00,000.00 |
$ 13,00,000.00 |
0.790 |
$ 10,27,160.49 |
3 |
$ 22,00,000.00 |
$ 6,00,000.00 |
$ 16,00,000.00 |
0.702 |
$ 11,23,731.14 |
4 |
$ 20,00,000.00 |
$ 8,00,000.00 |
$ 12,00,000.00 |
0.624 |
$ 7,49,154.09 |
5 |
$ 16,00,000.00 |
$ 10,00,000.00 |
$ 6,00,000.00 |
0.555 |
$ 3,32,957.37 |
NPV |
|
|
|
|
$ -55885.79 |
Trial Runs Table
Net Cash Flows |
PV |
|
PVF @13.5% |
PV |
|
$ -46,00,000.00 |
$ 1.000 |
$ -46,00,000.00 |
|
1.000 |
$ -46,00,000.00 |
$ 10,00,000.00 |
$ 0.885 |
$ 8,84,955.75 |
|
0.881 |
$ 8,81,057.27 |
$ 15,00,000.00 |
$ 0.783 |
$ 11,74,720.03 |
|
0.776 |
$ 11,64,392.87 |
$ 18,00,000.00 |
$ 0.693 |
$ 12,47,490.29 |
|
0.684 |
$ 12,31,076.16 |
$ 14,00,000.00 |
$ 0.613 |
$ 8,58,646.22 |
|
0.603 |
$ 8,43,615.58 |
$ 8,00,000.00 |
$ 0.543 |
$ 4,34,207.95 |
|
0.531 |
$ 4,24,727.79 |
|
|
$ 20.24 |
|
|
$ -55,130.34 |
IRR Formula= Lower Rate + NPV at Lower Rate / NPV at Lower Rate- NPV at Upper Rate X (Upper Rate – Lower Rate)
= 0.13 + 20.24 /20.24+55130.34 x (0.1350-0.13) = 13% Approximately
Trial Runs Table
Net Cash Flows |
PV |
|
PVF @11% |
PV |
|
$ -40,00,000.00 |
1.000 |
$-40,00,000.00 |
|
1.000 |
$-40,00,000.00 |
$ 8,00,000.00 |
0.893 |
$ 7,14,285.71 |
|
0.901 |
$ 7,20,720.72 |
$ 13,00,000.00 |
0.797 |
$ 10,36,352.04 |
|
0.812 |
$ 10,55,109.16 |
$ 16,00,000.00 |
0.712 |
$ 11,38,848.40 |
|
0.731 |
$ 11,69,906.21 |
$ 12,00,000.00 |
0.636 |
$ 7,62,621.69 |
|
0.659 |
$ 7,90,477.17 |
$ 6,00,000.00 |
0.567 |
$ 3,40,456.11 |
|
0.593 |
$ 3,56,070.80 |
|
|
$ -7,436.04 |
|
|
$ 92,284.06 |
IRR Formula = 0.13+ 7436.04/ 92284.06+7436.04 x (0.12-0.11) = 11.92% Approximately
Table for discounted payback period
Years |
Net Cash Flows |
Pvf |
Present Value Of Cashflows |
Cumulative Pv Of Cashflows |
0 |
$ -46,00,000.00 |
1.000 |
$ -46,00,000.00 |
$ -46,00,000.00 |
1 |
$ 10,00,000.00 |
0.889 |
$ 8,88,888.89 |
$ -37,11,111.11 |
2 |
$ 15,00,000.00 |
0.790 |
$ 11,85,185.19 |
$ -25,25,925.93 |
3 |
$ 18,00,000.00 |
0.702 |
$ 2,64,197.53 |
$ -12,61,728.40 |
4 |
$ 14,00,000.00 |
0.624 |
$ 8,74,013.11 |
$ -3,87,715.29 |
5 |
$ 8,00,000.00 |
0.555 |
$ 4,43,943.17 |
$ 56,227.88 |
|
|
|
Payback Period
|
4.87 years |
Payback period =4 + -3, 87,715.29/4, 43,943.17 = 4.87 Years
Note: As the NPV of the Investment 2 is negative, it would not have any Payback period as the cost of the initial investment would not be recovered during the entire project life.
Year |
Cash Inflows |
Cash Outflows |
Net Cash Flows |
Depreeciation |
Net Earnings |
0 |
$ – |
$ 46,00,000.00 |
$ -46,00,000.00 |
$ – |
$ -46,00,000.00 |
1 |
$ 16,00,000.00 |
$ 6,00,000.00 |
$ 10,00,000.00 |
$ 9,20,000.00 |
$ 19,20,000.00 |
2 |
$ 20,00,000.00 |
$ 5,00,000.00 |
$ 15,00,000.00 |
$ 9,20,000.00 |
$ 24,20,000.00 |
3 |
$ 24,00,000.00 |
$ 6,00,000.00 |
$ 18,00,000.00 |
$ 9,20,000.00 |
$ 27,20,000.00 |
4 |
$ 22,00,000.00 |
$ 8,00,000.00 |
$ 14,00,000.00 |
$ 9,20,000.00 |
$ 23,20,000.00 |
5 |
$ 18,00,000.00 |
$ 10,00,000.00 |
$ 8,00,000.00 |
$ 9,20,000.00 |
$ 17,20,000.00 |
Average net income of 5 Years = $ 111, 00,000.00/5 = $ 22, 20,000.00
ARR = $ 22, 20,000.00/ 46, 00,000.00 = 48%
Cash Inflows |
Cash Outflows |
Net Cash Flows |
Depreciation |
Net Income |
$ – |
$ 40,00,000.00 |
$ -40,00,000.00 |
0 |
$ -40,00,000.00 |
$ 14,00,000.00 |
$ 6,00,000.00 |
$ 8,00,000.00 |
$ 8,00,000.00 |
$ 16,00,000.00 |
$ 18,00,000.00 |
$ 5,00,000.00 |
$ 13,00,000.00 |
$ 8,00,000.00 |
$ 21,00,000.00 |
$ 22,00,000.00 |
$ 6,00,000.00 |
$ 16,00,000.00 |
$ 8,00,000.00 |
$ 24,00,000.00 |
$ 20,00,000.00 |
$ 8,00,000.00 |
$ 12,00,000.00 |
$ 8,00,000.00 |
$ 20,00,000.00 |
$ 16,00,000.00 |
$ 10,00,000.00 |
$ 6,00,000.00 |
$ 8,00,000.00 |
$ 14,00,000.00 |
NPV of Investment 2 is negative hence it should not be made rather investment 1 should be made as it as positive NPV.
IRR of capital investment 2 is less than the cost of capital hence it should not be undertaken rather investment 1 should be made as it has higher IRR than the cost of capital.
Investment 2 cannot recover its initial cost of investment during its life and hence it must be ignored and the investment 1 should be opted as it will recover the cost in 4.87 years.
ARR of investment 1 is higher than that of investment 2 and hence investment 1 is better
Sensitivity analysis is an important technique of capital budgeting which is used to evaluate the risk involved in any investment (project) plan. It helps the managers by providing the necessary information to take sound economic benefits ((Baker & English, 2011). This analysis involves the calculations to understand the impact of changes in the project’s input parameters on the particular project. Since the cash flows of Noothercompany Limited are fluctuating over the five years, it involves higher risk due to uncertainty of cash flows every year. Hence sensitivity analysis must be undertaken as a part of capital investment decision making process in the present case. Following variables should be sensitised this case:
Since, with the change in the above mentioned input parameters the NPV of the project will also be changed, therefore the degree of sensitivity of project’s NPV will have to be checked to assess the risk involved in the project. Therefore, sensitivity analysis must be undertaken for these variables.
|
Queensland (QLD) |
New South Wales (NSW) |
Net Profit (A) |
$ 2,20,000.00 |
$ 4,50,000.00 |
Cost of Investment (B) |
$ 10,00,000.00 |
$ 25,00,000.00 |
ROI [ (A/B)*100] |
22% |
18% |
Average net income of 5 Years = $ 9500000/5 = $ 19000000
ARR = $ 19000000/ 4000000 = 47.5%
Note: Investments are the only operating assets available in the question.
b) Residual Income = Net Operating Income-(Required Rate Of Return x Operating Assets)
|
|
QLD |
NSW |
Net Operating Income |
(A) |
$ 2,20,000.00 |
$ 4,50,000.00 |
Required Rate of Return |
(B) |
13% |
13% |
Operating Assets |
( C) |
$ 10,00,000.00 |
$ 25,00,000.00 |
RI [A –( B * C)] |
|
$ 90,000 |
$ 1,25,000 |
Residual income measures offers more accurate results than the return on investment measures as RI measures returns in dollars whereas ROI measures results in percentage.
Therefore, the manager should rely on the results of RI measures and select Division New South Wales for the further investment as it will generate higher income.
There is no benefit of using EVA in place of RI in this case as they are similar measures with the difference that the EVA measure considers operating profits after taxation effect. In this question there is no tax rate given so use of EVA would not make any difference.
|
year 1 |
year 2 |
year 3 |
year 4 |
year 5 |
Sales (A) |
$ 45,00,000.00 |
$ 65,00,000.00 |
$ 85,00,000.00 |
$ 65,00,000.00 |
$ 45,00,000.00 |
Cost Of Sales (B) |
$ 15,75,000.00 |
$ 22,75,000.00 |
$ 29,75,000.00 |
$ 22,75,000.00 |
$ 15,75,000.00 |
Gross Profit C= (A)-(B) |
$ 29,25,000.00 |
$ 42,25,000.00 |
$ 55,25,000.00 |
$ 42,25,000.00 |
$ 29,25,000.00 |
Less: Admin & Selling Expenses: |
|
|
|
|
|
Rent (D) |
$ 3,00,000.00 |
$ 3,00,000.00 |
$ 3,00,000.00 |
$ 3,00,000.00 |
$ 3,00,000.00 |
Repairs & Maintenance (E) |
$ 1,00,000.00 |
$ 1,00,000.00 |
$ 2,00,000.00 |
$ 2,00,000.00 |
$ 3,00,000.00 |
S & A Salaries (F) |
$ 4,00,000.00 |
$ 4,20,000.00 |
$ 4,41,000.00 |
$ 4,63,050.00 |
$ 4,86,202.50 |
Profit Before Depreciation (C-D-E-F) |
$ 21,25,000.00 |
$ 34,05,000.00 |
$ 45,84,000.00 |
$ 32,61,950.00 |
$ 18,38,797.50 |
Less: Depreciation |
$ 27,50,000.00 |
$ 20,62,500.00 |
$15,46,875.00 |
$ 11,60,156.25 |
$ 8,70,117.19 |
Profit Before Interest And Tax/Operating Profit |
$ -6,25,000.00 |
$ 13,42,500.00 |
$30,37,125.00 |
$ 21,01,793.75 |
$ 9,68,680.31 |
|
year 1 |
year 2 |
year 3 |
year 4 |
year 5 |
Operating Profit (from above table) |
$ -6,25,000.00 |
$ 13,42,500.00 |
$ 30,37,125.00 |
$ 21,01,793.75 |
$ 9,68,680.31 |
Add: Depreciation |
$ 27,50,000.00 |
$ 20,62,500.00 |
$ 15,46,875.00 |
$ 11,60,156.25 |
$ 8,70,117.19 |
Cash Flows Per Annum |
$ 21,25,000.00 |
$ 34,05,000.00 |
$ 45,84,000.00 |
$ 32,61,950.00 |
$ 18,38,797.50 |
NPV Application
|
Year 0 |
year 1 |
year 2 |
year 3 |
year 4 |
year 5 |
cash flows per annum |
$-110,00,000.00 |
$ 21,25,000.00 |
$ 34,05,000.00 |
$45,84,000.00 |
$ 32,61,950.00 |
$ 18,38,797.50 |
PVF @ 13% |
1 |
0.885 |
0.783 |
0.693 |
0.613 |
0.543 |
Present values |
$ -110,00,000.00 |
$ 18,80,530.97 |
$ 26,66,614.46 |
$ 31,76,941.94 |
$ 20,00,615.02 |
$ 9,98,025.61 |
NPV (Sum of PVs of Year 0 to Year 5) |
$ -2,77,271.99 |
|
|
|
|
|
Analysis: Since the NPV of the project is negative it must not be accepted.
Trial Run Table:
PVF @ 12% |
1.000 |
0.893 |
0.797 |
0.712 |
0.636 |
0.567 |
cash flows per annum |
$ -110,00,000.00 |
$ 21,25,000.00 |
$ 34,05,000.00 |
$ 45,84,000.00 |
$ 32,61,950.00 |
$ 18,38,797.50 |
PV |
$ -110,00,000.00 |
$ 18,97,321.43 |
$ 27,14,445.15 |
$32,62,800.66 |
$ 20,73,028.20 |
$ 10,43,383.08 |
NPV |
$ -9,021.48 |
|
|
|
|
|
PCF @ 11% |
1.000 |
0.901 |
0.812 |
0.731 |
0.659 |
0.593 |
cash flows per annum |
$ -110,00,000.00 |
$ 21,25,000.00 |
$ 34,05,000.00 |
$45,84,000.00 |
$ 32,61,950.00 |
$ 18,38,797.50 |
PV |
$-110,00,000.00 |
$ 19,14,414.41 |
$ 27,63,574.39 |
$33,51,781.29 |
$ 21,48,747.50 |
$ 10,91,236.82 |
NPV |
$ 2,69,754.41 |
|
|
|
|
|
IRR Formula= 0.11+ 269754.41 / 269754.41+9021.48 x (0.12-0.11) = 11.97% Approximately
Analysis: Since the IRR is lower than the required rate of return of 13%, the project must not be undertaken
Budgeting is the integral part of future planning. It has its own advantages and advantages that are given below:
Baker, H. K., & English, P. (2011). Capital budgeting valuation: Financial analysis for today’s investment projects (Vol. 13). John Wiley & Sons.
Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. Routledge.
DRURY, C. M. (2013). Management and cost accounting. Springer.
Wampler, B. (2010). Participatory budgeting in Brazil: Contestation, cooperation, and accountability. Penn State Press.
We provide professional writing services to help you score straight A’s by submitting custom written assignments that mirror your guidelines.
Get result-oriented writing and never worry about grades anymore. We follow the highest quality standards to make sure that you get perfect assignments.
Our writers have experience in dealing with papers of every educational level. You can surely rely on the expertise of our qualified professionals.
Your deadline is our threshold for success and we take it very seriously. We make sure you receive your papers before your predefined time.
Someone from our customer support team is always here to respond to your questions. So, hit us up if you have got any ambiguity or concern.
Sit back and relax while we help you out with writing your papers. We have an ultimate policy for keeping your personal and order-related details a secret.
We assure you that your document will be thoroughly checked for plagiarism and grammatical errors as we use highly authentic and licit sources.
Still reluctant about placing an order? Our 100% Moneyback Guarantee backs you up on rare occasions where you aren’t satisfied with the writing.
You don’t have to wait for an update for hours; you can track the progress of your order any time you want. We share the status after each step.
Although you can leverage our expertise for any writing task, we have a knack for creating flawless papers for the following document types.
Although you can leverage our expertise for any writing task, we have a knack for creating flawless papers for the following document types.
From brainstorming your paper's outline to perfecting its grammar, we perform every step carefully to make your paper worthy of A grade.
Hire your preferred writer anytime. Simply specify if you want your preferred expert to write your paper and we’ll make that happen.
Get an elaborate and authentic grammar check report with your work to have the grammar goodness sealed in your document.
You can purchase this feature if you want our writers to sum up your paper in the form of a concise and well-articulated summary.
You don’t have to worry about plagiarism anymore. Get a plagiarism report to certify the uniqueness of your work.
Join us for the best experience while seeking writing assistance in your college life. A good grade is all you need to boost up your academic excellence and we are all about it.
We create perfect papers according to the guidelines.
We seamlessly edit out errors from your papers.
We thoroughly read your final draft to identify errors.
Work with ultimate peace of mind because we ensure that your academic work is our responsibility and your grades are a top concern for us!
Dedication. Quality. Commitment. Punctuality
Here is what we have achieved so far. These numbers are evidence that we go the extra mile to make your college journey successful.
We have the most intuitive and minimalistic process so that you can easily place an order. Just follow a few steps to unlock success.
We understand your guidelines first before delivering any writing service. You can discuss your writing needs and we will have them evaluated by our dedicated team.
We write your papers in a standardized way. We complete your work in such a way that it turns out to be a perfect description of your guidelines.
We promise you excellent grades and academic excellence that you always longed for. Our writers stay in touch with you via email.