Course: Finance for Managers
Course code:
CONTENTS
1. Report to Directors of Bramble Waste Management a. Introduction b. Net Present Value c. Internal Rate of Return d. Tender Price for weekly Collection e. Tender Price for fortnightly Collection f. Other Financial Considerations
2. Report to Directors of Newtownabbot Borough Council a. Introduction b. Evaluation of the financial strengths and weaknesses of the three businesses short listed c. Company Ranking d. Key Financial Criteria for Consideration e. Further Considerations
Appendix 1 Workings for Weekly Collection
Appendix 2 Workings for Fortnightly Collection
1. Report to Directors of Bramble Waste
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Total Revenue Flows associated with the NBC Waste Collection Programme
Discount Factor of 12% | CCC | 1 | | 0.893 | £ 2,004,249.20 | 0.797 | £ 1,158,046.50 | 0.712 | £ 425,797.36 | 0.636 | £ 57,257.20 |
Table 3. Discount Factor of 12% and associated Costs of Capital for the 4yr period of the contract | (£) | Total Net Cash Flow @ 12% | 3,645,350.26 | | | Initial Outlay | 3,508,000.00 | | | NPV | 137,350.26 |
Table 4. Net Present Value Calculation for the lifetime of the contract
When using NPV to determine whether or not to invest in a project, the general rule is to accept the project if NPV > 0 and reject if NPV is negative (or zero). The NPV for the proposed NBC contract is, as seen in table 4 is £137,350.26. On this basis NPV the contract does appear a positive investment. To investigate this further the internal rate of return is calculated below. C) Internal Rate of Return
The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It will be used in this report to consider the expected return rate of the project in percentage terms rather than in pounds sterling (£). IRR | Initial Outlay | Yr 1 | Yr2 | Yr3 |
NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.
Team then commenced to apply some of the budgeting concepts discussed in class. First, NPV was calculated using the NPV function in Excel - approximately $419,000. In this calculation we found NPV to be a positive number thus indicating that the Super Project investment should be pursued by General Foods.
IRR uses all cash flows and incorporates the time value of money. When evaluating independent projects, IRR will always lead to the same decision as NPV. Because IRR assumes that cash flows will be reinvested at the internal rate of return, which is not always or even usually the case, it can rank mutually exclusive projects incorrectly. With certain patterns of cash flows, the IRR equation has more than one solution, which confuses the decision rule. IRR is slightly more
Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the
We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes.
Barring further analysis, the positive NPV indicates HPL should accept the proposal and proceed with expansion, as it would add value to the company. However, it should be noted that the NPV only becomes positive in year 10 (it is negative in all previous years). Thus, if HPL fails to extend the initial three-year contract with its largest retail customer and the project does not endure the estimated 10-year lifespan, it could in fact produce a loss in value for the company.
IRR is the rate at which the net present value becomes zero (Ross, Westerfield & Jordan, 2013). Additionally, IRR is calculated first by determining the Net Present Value. The Net Present Value is the variance concerning the market value and its cost (Ross, Westerfield & Jordan, 2013). Net present value is calculated by first finding the present value. For instance, 21.83 million (year 1 revenue from above) divided by 1 plus the companies rate of return of 12%. Thus, 21.83/(1+.12)= 19.49 is the present value for year 1. Furthermore, by adding the total revenue over the next 5 years we get 21.85+ 28.025+36.875+30.975+23.6=132.325 million is the expected value of revenue. That amount now needs to be placed into the present value equation previously discussed only this time with the exponent of 5 to cover the next 5 years. 132.325/(1+.12)^5=75.08 (rounded). Moreover, if
Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.
In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this
The ARR (Accounting rate of return) is the only method that compare the measure of profit over the life of a project to the amount of capital that must be invested to earn that profit. Once the ARR has been calculated, it is compared to the firm’s target return normally the organisation’s
1. What is the appropriate required rate of return against which to evaluate the prospective IRR 's from the B ANSWER:The appropriate rate of return against which to evaluate the IRR is the risk-free rate, plus the market risk
2. (TCO C) Your company has been offered credit terms of 4/30, net 90 days. What will be the nominal annual percentage cost of its nonfree trade credit if it pays 120
Internal rate of return (IRR) and Payback period “IRR of a project provides useful information regarding the sensitivity of the project’s NPV to errors in the estimate of its cost of capital” (Pierson et al.2011, pp.157).This proposal also shows the project is profitable by using Excel to get the IRR of 18.9%, which is
Internal rate of return (IRR) is a rate of return on an investment. The IRR of an investment is the interest rate that will give it a net present value of zero.
I hereby declare that I have read and understood BPP’s on plagiarism and that this is my original work, researched, undertaken, completed and submitted in accordance with the requirements of BPP Business School. The word count, excluding contents table, bibliography and appendices, is __3,025_ words.