PFF Outcome 4 – Project Appraisal Nadezda Valeckova Report: Project Appraisal To: Management of Matteck plc Prepared by: Nadezda Valeckova Date: 20/01/2015 Introduction I have been asked to produce a report for management of Matteck plc in which I will evaluate the financial viability of the investment proposal. The company is considering expanding into Asia. This operation would involve the acquisition of a factory, a purchase of several new motor vehicles and a new distribution unit. The following are the estimated costs of the planned investment: Description Cost Factory £ 1,100,000 Motor vehicles £ 500,000 Distribution unit £ 900,000 Total £ 2,500,000 The …show more content…
Therefore project should be accepted. ARR The ARR for the project is 12.8% this is less than required 15%. Therefore the project should be rejected. Recommendation In my opinion the company should reject the project as the ARR is much less than expected and the payback period is nearly as long as the maximum payback period which could put company to danger. Appendix 2 NPV The cash flow has been discounted at rate of 10%. The NPV is £ - 46,700 (negative) Therefore the project should be rejected. The required interest rate which would return an NPV of zero is 9.22%. This is less than the cost of capital of 10%. Other factors Impact of proposal on
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.
The Company should maximize on cash management by capital rationing on the project accepted. NPV of the project should be implemented as it reflects the time value of money invested in the accepted project. Similarly this can be further elaborated by computation of IRR of both project proposal.
7) See Table 1 NPV=42,318.71 IRR = 14% MIRR = 12% Payback period= 2.93 years. Yes the project should be undertaken.
The discount rate used is 10%, and the cash flows used are nominal, rather than real cash flows.
The company should accept this project. The project payback period is between 2 to 3 years.
The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.
The rule of internal rate of return is that the project with the higher rate of return must be accepted because its gives the clear indication that the project will succeed
D & J ltd is currently aware of only pay back method of project appraisal and has set a payback period of 2 years for accepting project. Payback method refers to the span of time within which the investment made for the project will be recovered by the net return of the project. D & J’s payback period option is 2 years, which means within these 2 years the initial investment will be recovered by means of the net returns to the selected project. The good thing about payback method is that it is easy to compute and it helps to prevent cash flow problems – since money will be recovered as early as possible. Hence, there are shortcomings of payback period method which needs to be taken under consideration before sticking with payback method only to choose project. One shortcoming of this method is that it overlooks the net income made available by the project after the payback period. In terms of same payback period, it can result to prefer a lower profit project.
4. Based on the information provided in the case, our group calculated the NPV for the project under both tax environment and tax-free condition, respectively, by using the excel spreadsheet and the NPV function. (For a detailed calculation of NPV, please refer to Appendix Under 15-yr.) According to our calculation, we have the following results: In the first case scenario, which the firm is in a tax environment (35% income tax), the NPV of the project equals to -$6,366,054.53
This project is reasonable and worth to take it. It will add more value to the company since its NPV is positive and has an attractive IRR and MIRR (higher than WACC). Moreover, the breakeven occurs in year two, in the middle of the project lifecycle, which is a good sign as well.
If the IRR exceeds the required rate of return (10%), the project should be accepted. Otherwise, it should be rejected.
3. If I was the financial manager, I would accept this project. Any project that adds a positive contribution to
Project A would be rejected if WACC was used as discount rate, because the internal rate of return (IRR) of the project is less than the WACC. This investment decision is not correct, however, since the project A would be accepted if a CAPM - the discount rate derived for specific projects is used because the project IRR is above the SML. The project offers a larger than necessary to compensate for the level of systematic risk, and accept that it will increase shareholder wealth
Each project must meet a minimum acceptable IRR and a maximum acceptable payback period. Two projects selected do not meet both of the management committees’ minimum requirements. That project is the plant expansion in Germany. The reason is because this project is necessary for the eastward market expansion, so their financials had to be considered in a consolidated manner. The eastward market expansion and the strategic acquisition both meet the requirements. The other is the effluent-water treatment at four plants, but it is mandatory since it is a regulatory requirement. The other two projects meet the minimum requirements.
notice that in this case we have summation from 0 to infinity because the process starts on the step one, it means we invest in project right now. Using our parameters we can see that NPV if invested today is equal $10.