Calculating Net Cash Flow, NPV, And Conducting Sensitivity Analysis For Multimakks Limited Project

Net Present Value

The following table shows the amount of the annual loan repayment and the repayment schedule. 

Let x be the instalment amount, present values of which altogether would amount to total loan amount. Then we get the instalment amount to be,

x PVIAF(8.6%, 5) = 24,00,000

Solving the above equation provides us with each instalment amount to be $ 610,631.29.

The loan repayment schedule for next five years is presented below:

NPV of the project (to the nearest dollar)

The net present value helps calculate the value created by the project by subtracting the present values of outflows from that of inflows. So, if the difference is positive the project is viable and should be accepted, and vice versa. The following table shows us the calculation of net present value of the project:

IRR of the project (as a percentage to two decimal places)

With the help of Interpolation, we get the IRR to be approximately 30.60%.

PB, the payback in years (to one decimal place)

Where,

a= the last period having a negative cumulative cash flow;
b= is the absolute value of cumulative cash flow at the end of the period a as mentioned above;
c= is the total cash flow for the period after a

ARR, the accounting rate of return (to two decimal places)

The formula for calculation of depreciation be diminishing balance has been mentioned below:

Depreciation Rate = 1- (Salvage Value/Acquisition value) ^ (1/n)

Putting the relevant data in above formula we get the depreciation rate to be 41.64% per annum. The following table shows us the calculation of depreciation:

PI (present value index or profitability index) (to two decimal places)

Taking the above calculations into consideration, we can say that the project is acceptable. The project overall seems to create value for the company and hence based o that we can say that the project should be accepted. Let us now analyse individual heads for consideration of this project (Atrill and McLaney, 2009):

Net Present Value: the net present value is the most common way to determine the viability of a project. The net present value calculated the value that can be created form the project. it is calculated by subtracting the present values of the outflows from the present values of cash inflows (Banks and Giliberti, 2008). The positive value indicates that project would earn more than what is to be invested in the beginning. Negative value shows that whatever was invested would also be not recovered. Therefore when the NPV is positive the project should be accepted, if negative then not. From the above calculations we see that the net present value of the project amounts to $868666, which is positive and the company should accept the project. (Bhattacharyya, 2011)

Internal Rate of Return

Internal rate of return: Internal rate of return is another tool which helps in determining the acceptability of the project. The internal rate of return is calculated by equating the present values of the cash inflows with the present values of cash outflows (Harrison, Horngren and Thomas, 2015). This helps to determine the real return which is to be earned by the project. This process of calculation of internal rate of return involved interpolation. If the internal rate of return from the project results to be greater than the cost of the project, then it indicates positive returns, and hence the project should be accepted, else vice versa. In the given case we see that the required rate of return for the given project is 13.8 %, whereas the internal rate of rate is 30.60%, this indicates that the project will generate positive values for the investors and hence the project should be accepted. (Izhar and Hontoir, n.d.)

Payback Period: the payback period method is one of the tools of capital budgeting which helps the investors analyse the period for which there investment amount will be recovered. The payback period approximately calculate the time period in which the whole amount investment will be recovered (Kimmel, Weygandt and Kieso, n.d.), after which all the cash flows form part of the earnings. Lower the payback period, better it is for the investors. In the given scenario the payback period results to be 2.3 years. The project involves a huge investment in order to start up, taking which into consideration the payback period of 2.3 years seems appropriate and hence the project is viable to be accepted. (Lalli, 2012)

Average Rate of Return: the average rate of return calculates the average percentage of profits which are expected to be earned over the period of the project (Lee and Epstein, 2012). Under this method we calculate the return from the project for each year, these returns are then added together in order to calculate the average return per year. This return is then divided by the investment amount in order to calculate the percentage of return per year. In the given scenario we see that the average rate of return amounts to approximately 20 percent per year for years. Therefore, the based on the average rate of return the project should be accepted as the cost if less than the return earned per year. (Loganathan, n.d.)

Payback Period

Profitability index: profitability index is more popularly known as profit investment ratio. This helps in calculation of ratio between the cash flow earned and the investments earned by the company. This ratio is considered viable when it is high (Loughran, 2011). This means higher the ratio better for the company. In the given case the ratio results to be 1.36 times which is satisfactory. Based on this calculation the project seems viable and should be accepted. (Piper, 2015) 

Note: for the calculations made below, we have not taken the expenses incurred on feasibility study into consideration as the nature of expense is sunk and already incurred.

 The following table shows us the calculation for NPV of the project:

The NPV of the project amounts to $ 244474, the NPV is positive and the project should be accepted.  

In order to have the sensitivity analysis the NPV the project will be calculated increasing the operating expenses by 1%, at 68.68% (68%*1.01=68.68%), we get the following:

NPV at 68% was $ 244474, NPV at 68.68% is -84309, and this indicates that for every one percent increase in operating expenses the NPV of the project will decrease by 134.49%.

Let us now do the same by increasing the cost of capital by 1% at 10.7565% (10.65*1.01=10.7565%)

NPV at 10.65% was $ 244474, NPV at 10.7565% is 214492, that means for every one percent increase in Cost of Capital the NPV of the project will decrease by 12.26%.  

The decision of capital budgeting is s very important decision making process (Shim, Siegel and Shim, 2013). When the investors look forward to take up a project they should not only look in the quantitative aspects but other important aspects should also be taken care of before acceptance of any project. The managerial decision of the company should be appropriate and suitable to the environment and nature of the project. This should be check before finalising the managing team for the said project (Warren., 2015). The management group so selected should not be rigid and should be flexible so that any changes which are required by the project in near future can be met with. The value of the project involves the flexibility option embed in it. It helps the company for future expansion possibilities. Therefore before appointment of the managerial tea for the project all points should be taken care of (Weygandt, Kimmel and Kieso, n.d.). 

References

Atrill, P. and McLaney, E. (2009). Management accounting for decision makers. 1st ed. Harlow: Financial Times/Prentice Hall.

Banks, A. and Giliberti, J. (2008). Budgeting. 1st ed. Boston: McGraw-Hill.

Bhattacharyya, D. (2011). Management accounting. 1st ed. Noida, India: Pearson.

Harrison, W., Horngren, C. and Thomas, C. (2015). Financial accounting. 1st ed. Boston: Pearson.

Izhar, R. and Hontoir, J. (n.d.). Accounting, costing and management. 1st ed. Oxford: Oxford University Press.

Kimmel, P., Weygandt, J. and Kieso, D. (n.d.). Financial Accounting. 1st ed.

Lalli, W. (2012). Handbook of budgeting. 1st ed. Hoboken (N.J.): Wiley.

Lee, J. and Epstein, M. (2012). Advances in Management Accounting. 1st ed. Bradford: Emerald Group Publishing Limited.

Loganathan, N. (n.d.). Foundations of budgeting. 1st ed. Sydney: UNSW Press.

Loughran, M. (2011). Financial accounting for dummies. 1st ed. Hoboken, N.J.: John Wiley & Sons.

Piper, M. (2015). Accounting made simple. 1st ed. [United States]: [CreateSpace Pub.].

Shim, A., Siegel, J. and Shim, J. (2013). Budgeting basics and beyond. 1st ed. Hoboken, N.J.: Wiley.

Warren. (2015). Financial Accounting. 1st ed. Cengage Learning.

Weygandt, J., Kimmel, P. and Kieso, D. (n.d.). Financial accounting. 1st ed.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order