Calculation of Net Present Value
|
Calculation of Net Present Value |
|||||
|
Years |
Cash Outflow |
Cash Inflow |
Factors |
P.V. of Cash Inflow |
P.V. of Cash Outflow |
|
0 |
30,000 |
1 |
0 |
30000 |
|
|
0 |
9960 |
1 |
0 |
9960 |
|
|
1 |
32400 |
72360 |
0.909091 |
65781.82 |
29454.55 |
|
2 |
32400 |
72360 |
0.826446 |
59801.65 |
26776.86 |
|
3 |
32400 |
72360 |
0.751315 |
54365.14 |
24342.6 |
|
4 |
32400 |
72360 |
0.683013 |
49422.85 |
22129.64 |
|
4 |
2000 |
0.683013 |
1366.027 |
||
|
230737.5 |
142663.6 |
||||
|
NPV= Total Cash Inflow-Total cash outflow |
88073.85 |
|
Calculation of Payback period |
|||
|
Years |
Cash Outflow |
Cash Inflow |
CI |
|
0 |
-30,000 |
-30,000 |
|
|
0 |
-9,960 |
-39960 |
|
|
1 |
-32,400 |
72360 |
0 |
|
2 |
-32,400 |
72360 |
39,960 |
|
3 |
-32,400 |
72360 |
79,920 |
|
4 |
-32,400 |
72360 |
1,19,880 |
|
Pay Back Period |
1 year |
|
Calculation of discounted Payback period |
||||||
|
Years |
Cash Outflow |
Cash Inflow |
Factor |
P.V. of Cash Inflow |
P.V. of Cash Outflow |
CI |
|
0 |
-30000 |
1 |
0 |
-30000 |
-30000 |
|
|
0 |
-9960 |
1 |
0 |
-9960 |
-39960 |
|
|
1 |
-32400 |
72360 |
0.909091 |
65781.82 |
-29454.5 |
-3632.73 |
|
2 |
-32400 |
72360 |
0.826446 |
59801.65 |
-26776.9 |
29392.07 |
|
3 |
-32400 |
72360 |
0.751315 |
54365.14 |
-24342.6 |
59414.61 |
|
4 |
-32400 |
72360 |
0.683013 |
49422.85 |
-22129.6 |
86707.82 |
|
Pay Back Period |
1.123333 |
The above calculation of investment appraisal through various technique depict that the new idea of investment of the company is quite attractive as it would offer good profitability to the company.
Issues which have been inherent while using the expected value in investment calculations:
It has been studied that there are various issues which always occur while an investment appraisal technique due to using an expected value. The main issue with expected value is that if the wrong expected value has been chosen the strategic planning of the company would be failed as the NPV of the company would depict a wrong answer and thus the decision making of the company and cost of the capital would not be worthy.
|
Calculation of Net Present Value |
|||||
|
Years |
Cash Outflow |
Cash Inflow |
Factors |
P.V. of Cash Inflow |
P.V. of Cash Outflow |
|
0 |
30,000 |
1 |
0 |
30000 |
|
|
0 |
9960 |
1 |
0 |
9960 |
|
|
1 |
86400 |
192960 |
0.909091 |
175418.2 |
78545.45 |
|
2 |
86400 |
192960 |
0.826446 |
159471.1 |
71404.96 |
|
3 |
86400 |
192960 |
0.751315 |
144973.7 |
64913.6 |
|
4 |
86400 |
192960 |
0.683013 |
131794.3 |
59012.36 |
|
4 |
2000 |
0.683013 |
1366.027 |
||
|
613023.3 |
313836.4 |
||||
|
NPV= Total Cash Inflow-Total cash outflow |
299186.9 |
|
Calculation of Net Present Value |
|||||
|
Years |
Cash Outflow |
Cash Inflow |
Factors |
P.V. of Cash Inflow |
P.V. of Cash Outflow |
|
0 |
30,000 |
1 |
0 |
30000 |
|
|
0 |
9960 |
1 |
0 |
9960 |
|
|
1 |
43200 |
96480 |
0.909091 |
87709.09 |
39272.73 |
|
2 |
43200 |
96480 |
0.826446 |
79735.54 |
35702.48 |
|
3 |
43200 |
96480 |
0.751315 |
72486.85 |
32456.8 |
|
4 |
43200 |
96480 |
0.683013 |
65897.14 |
29506.18 |
|
4 |
2000 |
0.683013 |
1366.027 |
||
|
307194.6 |
176898.2 |
||||
|
NPV= Total Cash Inflow-Total cash outflow |
130296.5 |
Opportunity cost is the loss of other substitutes when one substitute has been chosen. Opportunity cost depicts to an advantage which an organization could receive, but gave up, for taking another project. In other words, an opportunity cost signifies a substitute which has been given up while decision making. Therefore, this cost is most relevant for mutually exclusive projects.
In case of Nine Bells Brewery Ltd, it has been found that the staff of the company is also looking for a new project in which company would be able to sell more beers through a supermarket chain. So this case would be considered as opportunity cost as company would not be able to carry that project with current project so the profit from that project would b the opportunity cost for the company.
There are many investment appraisal techniques which are used by the organizations for making different decisions. Every investment appraisal technique offers different results.
In this case, Net present value offers the information about the total profit of the company whereas payback period depict that how much time would it take for the company to recover the cash, outflow at the same time, discounted payback period depict that how much time would it take for the company to recover the cash and it also consider the discounted factor.
Thus it could be said that every investment appraisal technique is used for different decision making, the best investment appraisal technique is Net present value as it depicts the manager that how much profit would be earned through this investment proposal.
The strength and weakness of Net present value are as follows:
Discussion of Stakeholder Needs
The main pros of NPV technique are that it considers the essential idea that what would be a dollar’s future value after a particular time period. NPV technique provides information about the total profit company could get through an investment proposal.
The main weakness of NPV technique is that it needs the estimation into concern about the cost of capital. Statement of a inferior cost of capital will provide a result of suboptimal investment proposals.
Financial analysis of Greene king:
|
Computation of ratio analysis |
||
|
Liquidity ratio |
2016 |
2015 |
|
Current ratio |
0.72453181 |
0.583599574 |
|
Quick ratio |
0.669677248 |
0.526624068 |
|
Working capital |
-207.4 |
-234.6 |
|
Profitability Ratios |
2016 |
2015 |
|
Operating Profit Margin |
0.176700434 |
0.161408044 |
|
Net Profit Margin |
0.09208876 |
0.067893256 |
|
Return on Capital Employed |
0.1 |
0.1 |
|
Return on Equity |
0.101889411 |
0.086791719 |
|
Return on Total assets |
0.034033374 |
0.026936535 |
|
Debt equity ratio |
||
|
Capital structure ratio |
2016 |
2015 |
|
Debt- equity |
1.993808711 |
2.222081835 |
|
Interest coverage ratio |
2.057865169 |
2.248940678 |
|
Efficiency ratio |
||
|
Efficiency ratio |
2016 |
2015 |
|
Receivable turnover ratio |
29.27966102 |
22.08732158 |
|
Creditor turnover ratio |
8.529235382 |
|
|
Inventory turnover ratio |
46.50408719 |
18.72665535 |
|
Assets turnover ratio |
0.464569047 |
0.396347803 |
Relevant financial information for a shareholder:
Shareholders look for the financial and non financial information of a company before investing into the company. In case of Grrene King Plc, it has been found that the following information would be required for a shareholder to invest into the company:
Liquidity ratio:
Revenue of the company from last 5 years:
New project investment of the company:
Gearing ratio of the company
Above are some of the factors which would help the shareholder to make decision about the investment in the company. Through analyzing all of these factors it is suggested to the company to invest into the company for short as well as long term as fundamental and technical analysis of the company depict that company is perfuming very well from last few years and it would offer a grit return to its shareholders.
Relevant financial and non financial information for a commercial bank:
Commercial banks look for the financial and non financial information of a company before lending money to the company. In case of Grrene King Plc, it has been found that the following information would be required for a commercial bank to lend the money to the company:
Efficiency ratio:
Liquidity ratio:
Revenue of the company from last 5 years:
New project investment of the company:
Gearing ratio of the company
Changes into the total asset and total liability of the company from last 5 years
Competition analysis
Changes in the market and economy
Trend in the industry
Political changes etc
Above are some of the factors which would help the commercial bank to make decision about lending the money to the company. Through analyzing all of these factors it is suggested to the bank to lend the money to the company for short as well as long term as the financial and non financial performance of the company is very well from last few years and thus there are fewer chances for the company to become bankrupt.
Critical Analysis of Ratio Analysis as a Tool
Calculation of profit:
|
Cost sheet |
||||
|
Naggin |
Ello |
Cloud 11 |
Total |
|
|
Revenue ($1000*6000units) |
$ 1,34,160 |
$ 1,46,640 |
$ 1,56,000 |
$ 4,36,800 |
|
Variable cost of goods sold: |
||||
|
Beginning inventory |
$ – |
– |
– |
|
|
Variable manufacturing costs |
||||
|
Material |
$ 31,200 |
$ 32,240 |
$ 33,280 |
$ 96,720 |
|
Duty |
$ 52,000 |
$ 62,400 |
$ 72,800 |
$ 1,87,200 |
|
cost of goods sold available for sale |
$ 83,200 |
$ 94,640 |
$ 1,06,080 |
$ 2,83,920 |
|
Less: ending inventory ($200*2000 units) |
– |
– |
– |
|
|
Variable cost of goods sold |
$ 83,200 |
$ 94,640 |
$ 1,06,080 |
$ 2,83,920 |
|
Variable marketing costs ($185*6000 units sold) |
– |
– |
– |
|
|
contribution margin |
$ 50,960 |
$ 52,000 |
$ 49,920 |
$ 1,52,880 |
|
Total contribution |
$ 1,52,880 |
|||
|
Fixed Cost |
||||
|
Management |
$ 30,000 |
|||
|
Brewing Staff |
$ 51,000 |
|||
|
Rent rates |
$ 15,000 |
|||
|
Maintenance |
$ 12,000 |
|||
|
Total Fixed cost |
$ 1,08,000 |
|||
|
Operating income (profit) |
$ 44,880 |
Through the calculation, it has been found that the total profit of the company is $44880 in a year if company produces 2 brew of each bear in a week.
|
Cost sheet |
||||
|
Naggin |
Ello |
Cloud 11 |
Total |
|
|
Revenue ($1000*6000units) |
$ 1,34,160 |
$ 1,46,640 |
$ 1,56,000 |
$ 4,36,800 |
|
Variable cost of goods sold: |
||||
|
Beginning inventory |
$ – |
– |
– |
|
|
Variable manufacturing costs |
||||
|
Material |
$ 31,200 |
$ 32,240 |
$ 33,280 |
$ 96,720 |
|
Duty |
$ 52,000 |
$ 62,400 |
$ 72,800 |
$ 1,87,200 |
|
cost of goods sold available for sale |
$ 83,200 |
$ 94,640 |
$ 1,06,080 |
$ 2,83,920 |
|
Less: ending inventory ($200*2000 units) |
– |
– |
– |
|
|
Variable cost of goods sold |
$ 83,200 |
$ 94,640 |
$ 1,06,080 |
$ 2,83,920 |
|
Variable marketing costs ($185*6000 units sold) |
– |
– |
– |
|
|
contribution margin |
$ 50,960 |
$ 52,000 |
$ 49,920 |
$ 1,52,880 |
|
Total contribution |
$ 1,52,880 |
|||
|
Fixed Cost |
||||
|
Management |
$ 10,000 |
$ 10,000 |
$ 10,000 |
$ 30,000 |
|
Brewing Staff |
$ 17,000 |
$ 17,000 |
$ 17,000 |
$ 51,000 |
|
Rent rates |
$ 5,000 |
$ 5,000 |
$ 5,000 |
$ 15,000 |
|
Maintenance |
$ 4,000 |
$ 4,000 |
$ 4,000 |
$ 12,000 |
|
Total Fixed cost |
$ 36,000 |
$ 36,000 |
$ 36,000 |
$ 1,08,000 |
|
Operating income (profit) |
$ 14,960 |
$ 16,000 |
$ 13,920 |
$ 44,880 |
|
Breakeven volume |
92 |
92 |
92 |
|
|
MOS |
12 |
12 |
12 |
|
|
Total Sales |
104 |
104 |
104 |
Through the calculation, it has been found that the break even volume of company is 92 units of each bear, the margin of safety of company is 12 units and total sales of the company is 104 units for each bear.
|
Cost sheet |
||||
|
Naggin |
Ello |
Cloud 11 |
Total |
|
|
Revenue ($1000*6000units) |
$ 2,01,240 |
$ 2,19,960 |
$ 1,56,000 |
$ 5,77,200 |
|
Variable cost of goods sold: |
||||
|
Beginning inventory |
$ – |
– |
– |
|
|
Variable manufacturing costs |
||||
|
Material |
$ 46,800 |
$ 48,360 |
$ 33,280 |
$ 1,28,440 |
|
Duty |
$ 78,000 |
$ 93,600 |
$ 72,800 |
$ 2,44,400 |
|
cost of goods sold available for sale |
$ 1,24,800 |
$ 1,41,960 |
$ 1,06,080 |
$ 3,72,840 |
|
Less: ending inventory ($200*2000 units) |
– |
– |
– |
|
|
Variable cost of goods sold |
$ 1,24,800 |
$ 1,41,960 |
$ 1,06,080 |
$ 3,72,840 |
|
Variable marketing costs ($185*6000 units sold) |
– |
– |
– |
|
|
contribution margin |
$ 76,440 |
$ 78,000 |
$ 49,920 |
$ 2,04,360 |
|
Total contribution |
$ 2,04,360 |
|||
|
Fixed Cost |
||||
|
Management |
$ 30,000 |
|||
|
Brewing Staff |
$ 51,000 |
|||
|
Rent rates |
$ 15,000 |
|||
|
Maintenance |
$ 12,000 |
|||
|
Total Fixed cost |
$ 1,08,000 |
|||
|
Operating income (profit) |
$ 96,360 |
Through the above calculation, it has been found that if the company uses the entire resources than the total profit of the company would be $96360 in a year, in that case company have to produce 3 brews of Naggin and ello and 2 brew of cloud 7 in a week.
Breakeven point is essential for every manufacturing company to calculate as it offers the information about losses and profit of the company to the production manager. In case of Nine Bells Brewery, it has been found that the BEP, MOS and sales of the company for each bear is 92, 12 and 104 units.
Through the BEP analysis of the company, it has been found that company is enough capable to meet entire cost of the production. Further, there are less chances of the company to face any risk in terms of loan.
BEP calculation of the company also depict that company is required to make some changes into its fixed cost as the fixed cost of the company is quite higher which makes a direct impact over the break even volume of the company.
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