Quantitative analysis of Q-Powerboat
Discuss about the Cash training and improved microfinance outcome.
The concerned report is related to have knowledge about the boats that are produced by “PENTAG” Company. The company has constructed the plan of producing powerboats, which would be environment friendly in nature in order to reduce the pollution level in the environment. This is seen to be a niche market and therefore effective level of development and researches would create much better and advanced products. The firm has decided to take more investments from the market in order to start producing the new products and hence new and improved plants and machineries are in demand and additional cost of transaction would be levied. “PENTAG” demands for investment in the initial stock and hence the firm has decided to finance the new project by issuing 10% debentures of $10 million and the additional money would be collected from the equity. In this scenario, it is essential for the company to gain an understanding of the project that stays fit and thereafter construct steps and plans with the help of which they would be able to improve their operational activities. The company has recommended two projects and they are manufacturing of “Q-Powerboat” and manufacturing of “S-Powerboat” and in order to understand the one that is ideal for the company, an evaluation of the concerned two projects has been initiated and thereby understand, which of the projects give out better return on investment. A comparative analysis of the statement of the cash flows has been effective enough in order to have a clear idea of the approach of capital budgeting that can be undertaken in order to assess the two concerned projects.
This section of the report addressees the outcome of the overall research that has been gathered after the examination of the constructed cash flow statement and the outcome that is created are in line with the qualitative and the quantitative elements that are associated with the two projects.
The quantitative aspect refers to the figures and amounts that have been constructed by creating the cash flow statement and accordingly the results that have been obtained will be explained in an effective manner. The initial investment of $21,500,000 has been found for “Q-Powerboat” and the plant and equipment cost has been $20,000,000. The transportation and installation cost has been $800,000 whereas the stock investment has been $500,000 and the additional fund from the debtor has been $380,000. In this manner, a cash flow statement for the coming six years has been constructed for “Q-Powerboat”. The net operating cash flow for this project has been found to be $8,973,000 after the end of year one and thereafter the results have shown that there has been a fall in the net operating cash flow in the coming years and at the end of the sixth year the figure has been $5,823,000. “Q-Powerboat” project has its net salvage value to be $2,800,000. The initial rate of discount for “Q-Powerboat” is 20% after which assessment has been made with respect to the discovery of the cumulative discounted cash flow value. The net cash flow for “Q-Powerboat” project has been $8,973,000 in the first year and then this value has diminished but the in the last year the value has been $8,623,000, which has been relatively higher than the previous years. The cash flow statement has been able to address the internal rate of return, net present value, payback period and discounted payback period. The values for net present value are seen to be $4,276,443, while the internal rate of return has been 29.67%. The payback period has been 2.54 and on the other hand 4.135 has been the discounted payback period.
Quantitative analysis of S-Powerboat
Now, while considering “S-Powerboat” it is observed that the initial investment has been same and the value has been $21,500,000 and this money has been utilised in the purchase of plant and machinery worth $20,000,000, cost of installation to be $800,000 and the stock in investment to be $500,000. The future cash flow of the project has been rising from the initial year and at the end of the sixth year the figure amounted to $11,100,000. In the first year, the net cash flow has been $6, 40,000 and this figure increased to $11,100,000 in the last year. The attainment of these values have led to the discovery of net present value and the same has been $4,288,489 at an internal rate of return at 28.42%, 2.97 has been the payback period and 4.618 has been the discounted payback period at a discount rate of 20%. The outcome at 20% discounted rate has explained that both the projects are favourable however; “S-Powerboat” has a slight edge over “Q-Powerboat”.
On the other hand, when the discount rate is increased from 20% to 25%, there has been a massive change in the values of the two projects. As the discount rate has changed, there has been no effect on the net cash flow for the two projects but because the discount rate has changed it is seen that there has been fall in the net present value and the other rates of returns as well. For “Q-Powerboat”, the net present value has accounted to $1,794,528. In the same manner, the internal rate of return has been 29.47% and the payback period has the same percentage as the discount rate of 20% and the percentage has been 2.54%. The change in the discounted payback period has been 5.008.
By assessing the amended cash flow statement of “S-Powerboat” the changes have only been observed in the net present value and discounted payback period. The values that have been obtained have indicated the fact that the net present value has been $1,504,466 and the discounted payback period has been 5.338 for “S-Powerboat”.
These have been the quantitative aspects that has been discovered for the two projects and the results indicate that alterations in the discounted rate has led to the effects on the net present value and the impact has been higher for “S-Powerboat” than “S-Powerboat” as the figures indicate that the net present value decline margin has been higher for “S-Powerboat”. The changes have even affected the discounted payback period and the discounted payback period has been higher for “S-Powerboat” than “Q-Powerboat” at 25% discount rate. In this manner, it is seen that “Q-Powerboat” has better potential to handle market changes in accordance to “S-Powerboat” and therefore “Q-Powerboat” is a more favourable project for “PENTAG”.
Qualitative analysis of the two projects
The two projects have related qualitative aspects as well and this is seen with the environmental effects the projects would have. The two projects are concerned with the production of small powerboats and therefore spillage of oil and emission of carbon are the impact the boats can have on the marine ecosystem. It is due to this fact that the company has been looking to manufacture eco-friendly products. The qualitative aspects is related to the quantitative aspects as it is seen that decline in the net present value would have an impact on the market share of the company, level of investment and the brand image. By assessing the risks and the issues that are qualitative in nature one can come to a conclusion that “S-Powerboat” is more risky project than “Q-Powerboat” as the carbon emission would be lower for “Q-Powerboat” and the change in the discount rate would have lesser impact on the net present value of “Q-Powerboat”. In the same manner, the discounted payback period for “Q-Powerboat” has been lower than “S-Powerboat” and therefore “Q-Powerboat” is should be the selected projected for the organization.
The analysis of the aspects that have been discussed earlier in this report has been helpful in creating an understanding that “PENTAG” has the liberty to take up one of the two projects for their expansion programme. The outcome of the qualitative and quantitative aspects have led to the fact that “Q-Powerboat” has better net present value and discounted payback period in accordance to the changing market scenario in comparison to “S-Powerboat” and “Q-Powerboat” with its effective net present value would attract additional investments in the project and thereby would increase the market share and the revenue for the company. It is seen that the eco-friendliness of the “Q-Powerboat” has been higher as the pollution level is seen to be lower and therefore by looking into this aspect, one can come to conclusion that “Q-Powerboat” is project that can be taken up by “PENTAG”.
A comparison in an explicit manner has even been initiated and the results reveal that when the discount rate is fixed, the net present value has been better for “S-Powerboat” but the scenario changes when there is a change in the discount rate. In this scenario, “Q-Powerboat” has been found to be much better. The analysis of both the projects have highlighted that both the projects are similar in nature but changes in the market rates and the qualitative aspects have determined that “Q-Powerboat” is ideally suitable for “PENTAG”. Furthermore, 20.17% is the cross over percentage for the two projects and therefore “PENTAG” should move ahead with “Q-Powerboat” project.
Conclusion
The overall report has therefore explained the various problems that have been faced by “PENTAG” as they were having issues understanding which of the two projects would be ideal for them to expand their business and start a new business line. However, the assessment of the qualitative and quantitative aspects associated with the two projects have indicated that “Q-Powerboat” is a much better project to initiate for “Q-Powerboat” than “S-Powerboat” in order to maintain competitive edge and attain the mission and vision statement of “PENTAG”.
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