Capital Budgeting Analysis for Bathurst and Wodonga Production Options
Capital Budgeting of Wodonga and Bathurst Site
Figure 1: Capital Budgeting for Wodonga Site
(Source: As Created By Author)
Figure 2: Capital Budgeting of Bathurst site
(Source: As Created By the Author)
The statements that are computed in accordance to the two production sites by calculating the capital budgeting process has explained that out of the two sites, the site in Wodonga is much more effective for Saturn Pet Care. The analysis that has been done in the above table has explicitly addressed the payback period evaluation, index of profitability and analysis of the net present value. In this manner, the analysis of the two manufacturing sites have indicated that the net present value of Wodonga has been $ 95,94,827 and this value has been way higher than Bathurst site as their value has been $58,44,567. On the other hand the profitability index of Wodonga has revealed the same result as well as their index value has been 1.349, which is more than 1.117, which the value for Bathurst. In the similar manner, it is seen that payback period for Wodonga has been better than Bathurst and thereby indicates the fact that Saturn would be more profitable if they undertake the manufacturing process with the help of Wodonga site.
This is known to be the strategy that is in general cases followed by the companies with the help of which the companies diminishes their level of sales in order to bring in a new product and accordingly endorse of their product in the market (Frank, & Shen 2016). In this manner, it is seen that Saturn Pet Care can even undertake this process with the help of which they would be able to endorse their product which the the administration of the company has though making an introduction.
According to the current circumstances, it is seen that Nathan is a director of Saturn Pet Care and he has the point that the projected sales is much higher and therefore in order to mitigate the planning approach that is undertaken by the management, this sales needs to be reduced. The error that is found with respect to the projection of the sales can be resolved by making use of net present value, which would increase the projection of the cash outflows with the help of which the error that has been created can be resolved (Krüger et al., 2015).
Product Cannibalization in Capital Budgeting Decisions
Nathan has the idea that the real cost of the factory spot has been brought in within the initial investment that has been undertaken with the help of which the accurate projection can be undertaken. This notion of Nathan is unfitting as it is seen that net present value looks to consider the site for the factory that has been recently been built for the purpose of undertaking the production activities (Lane, & Rosewall 2015).
This section of the assignment is associated with ARB Ltd and accordingly tries to assess the capital structure of the organization. This company is mainly related to the production industry and therefore their efficacy and limitations with respect to their capital structure needs to be understood. This report would therefore assess the capital structure of the firm and accordingly understand the changes that have taken place.
By assessing the capital structure of ARB Ltd there has been an observation that the company only utilises the equity capital. Debt capital is not employed by the firm and therefore the capital of the firm is totally reliant on equity. The capital structure that is currently been followed has been explained in the following table.
ARB Ltd has a weighted average cost of capital to be 18.05%. The observations indicate that there has been a decline in the capital in accordance to the projections that have been last year and this accordingly addresses the fact that financial expenses has declined and this is a positive signal (Magni, 2015). In the previous year, the weighted average cost of capital has been 19.01%.
ARB Ltd has an equity cost in accordance to CAPM to be 7.906% and this percentage has been ideal by looking into the fact that the market return has been 8.54%. The values therefore has been able to address the desires of the shareholders (Robinson, & Sensoy 2016).
It is seen that Modine Ltd operates in the manufacturing company and they manufacture similar products as ARB Ltd. Modine Ltd makes use of both debt and equity as their capital and thereby explains that the company looks to maintain a capital structure that is considerable with the help of which the risks related to the business can be mitigated (Berk, & Van Binsbergen 2016). However, it is seen that ARB has their capital consisting of equity. The debt and the equity capital for Modine Ltd has been $519.90 in millions and $ 421.20 in millions. The results explain that Modine Ltd has effective capital framework than ARB Ltd.
Addressing Nathan’s Concerns
The profitability, efficiency and solvency ratio for ARB Ltd has been explained in the tables below. The figures indicate that the current ratio has increased in accordance to the projections that have been made in the last year and this explains the liquidity scenario has developed. It is even observed that the debt to equity ratio has improved as well which explains that there has been improvements in the level of debts (Ondraczek et al., 2015). The ratio that has increased for the company has been inventory turnover ratio and all the ratios explain that the company has been performing in an effective manner.
The table above has indicated the fact that there has been transformations in the structure of the capital year after year and the company has their capital based on their equity.
ARB Ltd has been incompetent in undergoing developments that they thought of making in the last year. The “NOPAT” for ARB has augmented by a bit, but it is seen that the organization needs to look into their wealth maximisation concept.
Conclusion
The following are the suggestions that can be provided to ARB Ltd:
- ARB Ltd requires to plan policies in order to enhance their concept of maximisation of wealth with respect to their operational activities (Žižlavský, 2014).
- ARB Ltd has to bring in debt in their capital framework so that considerable and equitable capital mix can be maintained.
The assessment of the financial analysis has been able to explain the fact that capital structure of ARB Ltd can be enhanced by incorporating debt capital, which will be helpful in reducing the extent of risk as the capital would be balanced in an effective manner. In this manner, ARB Ltd has to be enhance their capital in order to pay back to the shareholders
Reference List
Berk, J. B., & Van Binsbergen, J. H. (2016). Assessing asset pricing models using revealed preference. Journal of Financial Economics, 119(1), 1-23.
Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), 300-315.
Krüger, P., Landier, A., & Thesmar, D. (2015). The WACC fallacy: The real effects of using a unique discount rate. The Journal of Finance, 70(3), 1253-1285.
Lane, K., & Rosewall, T. (2015). Firms’ investment decisions and interest rates. Reserve Bank of Australia Bulletin. June quarter, 1-7.
Magni, C. A. (2015). Investment, financing and the role of ROA and WACC in value creation. European Journal of Operational Research, 244(3), 855-866.
Ondraczek, J., Komendantova, N., & Patt, A. (2015). WACC the dog: The effect of financing costs on the levelized cost of solar PV power. Renewable Energy, 75, 888-898.
Robinson, D. T., & Sensoy, B. A. (2016). Cyclicality, performance measurement, and cash flow liquidity in private equity. Journal of Financial Economics, 122(3), 521-543.Žižlavský, O. (2014). Net present value approach: method for economic assessment of innovation projects. Procedia-Social and Behavioral Sciences, 156, 506-512.
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