Analysis of the Project
The main purpose of this assessment is to analyze the business of Robertson Family Business Pty Ltd (RFBP) which is engaged in the business of Automobile repair and also is a registered insurance repairer for major insurance companies. The business is trying to further expand the business with the help of new development and establishing a new workshop for the business. The assessment shows application of investment appraisal techniques for the purpose of analyzing the viability of the project which is considered by the management of the company.
As per business conditions of RFBP, the business mainly operates in repairing automobiles which are historical or for insurance purposes. The business has two adjoining plots of land out of which on one of them an office, workshop and spray booth is constructed while the other plot of land is kept vacant for use as per the needs of the business. The chairman of the business John wants to expand the business further and use the plot of land which is vacant for such a purpose. The management of the company is planning to expand the business by using this plot of land by setting up a new workshop, car parking area and spray booth. Furthermore, the management of the company is planning to use a new technology by the help of which the business would be able to use German spray booth which is estimate to increase the efficiency and profitability of the business and thereby aid at expansion and development of the business. The other option which is available to the management of RFBP is to sell the vacant plot of land for which the management has received a significant offer for the vacant plot. The cash which is generated from sale of this vacant plot of land can be used by the business to further strengthen the business of RFBP.
In order to effectively analyze the expansion plan of the business, the management of the business has decided to use appraisal techniques for the purpose of assessing whether the project which is suggest is worth making investment in or not.
The table above shows the computation which is done for the expansion project which is to be undertaken by the company and includes computation of net operating cash inflows which are forecasted by the business, NPV and IRR of the project. The maintenance growth rate of the business is anticipated to be at 3% as per the expectation of the management. The tax administrator of business advises that the management that the anticipated return of the project should be around 15%. In addition to this, the management also anticipated that the costs, revenue and the wages costs of the business would also be increasing from fourth year onwards which also in way affects the anticipated operating cash flows of the business.
The table which is shown above shows that the net operating cash flows of the business are shown to be positive which suggest that the project will be successful as the cash inflows from the projects are positive and this can be considered to be a favorable sign for the business. The appraisal for the investment project is done for a period of 10 years and on the basis of the net operating cash flows computed for the 10 years period NPV and IRR of the project is computed as shown in the table above. In order to undertake the project, the initial investment which is required to be made by the management of the company is shown to be $ 964,500 which includes major capital expenditure of building new workshop and spray booth on the vacant land, cost of new spray equipment and machinery, cost of new parking place which is to be built in the spot (Zhou et al. 2015). The operating cash flows of the business which is computed in the table above also shows that the estimates are on a rising trend which suggest growth in profitability and earning capacity of the business. The NPV of the project is shown to be $ 121,928 for the project which is computed considering the operating cash flows of the business. The NPV of the project is shown to be positive which suggest that the project is appropriate for the business and is also profitability. The internal rate of return of the project is shown to be 17.97% which is more than the anticipated rate of return which is also a positive factor for the business and also suggest that the project is profitable in nature (Bianchini et al. 2016). Therefore, it can be said that if the management of the company accepts this project than they will be able to generate appropriate amount of revenue from the project and thereby also fulfill the expansion plan of the business.
The management however needs to consider the rise in costs of the business also while making the decision regarding acceptance of the project or not. The management would be required to recruit more employee for the working and management of the employees of the business and thereby the wages costs of the business would also rise and also the maintenance costs of the business is also anticipated to rise as shown in the table which is portrayed above.
Conclusion
Thus, from the discussion which is conducted in the above section, it is clear that the expansion plan which is formulated by the management is profitable in nature and therefore the management of the business should move forward with the project. The management also needs to maintain and supervise the activities of the business so that the costs of the business can be reduced effectively. The expansion should be approved by the business and the all the necessary initial investment which the business needs to invest must be undertaken by the management of RFBP.
There are also other factors which a business needs to consider while take a decision regarding the expansion project which can affect the business directly or indirectly. The other factors which needs to be considered by the business while accepting the expansion project are given below in details:
- Cost of Production: Th cost of production has a direct impact on the profitability of the business and therefore the costs need to considered and controlled in order to maximize the profits of the business. For the project, the management anticipates that the wages costs and maintenance costs of the business will be rising and figure 1 shows constant increase in the costs of the business which affect the profit generating capacity of the business. The management needs to control the costs of the business effectively in order to further enhance the profit generating ability of the business and make the expansion plan a success.
- Inflationary Pressure: The pressure of inflation is another factor which affect the business adversely and can lead to higher cost of production for the business. In addition to this, high inflation in an economy can lead to increase in the costs of raw materials which can also increase the price charged by the business. In addition to this, interest rate of loans is also affected adversely by inflation and can affect a business severely when it comes to appropriate servicing of the debt. Thus, the management also needs to consider such a situation as this would make the expansion project ineffective.
- Financing Requirements: In order to undertake the expansion project as per the plan of the business, the management would be requiring appropriate financing source for undertaking the initial investment which is required for the project. The case shows that the management of RFBP does not have appropriate capital in hand for undertaking the project and therefore they would be needing to take a loan of long term nature in order to support the initial capital requirement of the project. The management needs to consider the source of capital which is to be taken and also the cost of capital associated with the same before undertaking any decision regarding the expansion project.
- Presence of New Technology: The management of RFBP also needs to confirm that no other superior technology is present in the market which can be an alternative for the German spray booth technology which the management of the company wishes to install. In case there is a better technology present, the management needs to conduct cost analysis for the same and incorporate the most recent technology in order to stay technologically advanced and ahead of the potential competitors of the business. This will also be providing the business with a chance to gain competitive advantage in the market.
Reference
Bianchini, A., Gambuti, M., Pellegrini, M. and Saccani, C., 2016. Performance analysis and economic assessment of different photovoltaic technologies based on experimental measurements. Renewable Energy, 85, pp.1-11.
Zhou, C., Gong, Z., Hu, J., Cao, A. and Liang, H., 2015. A cost-benefit analysis of landfill mining and material recycling in China. Waste management, 35, pp.191-198.
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