Project Selection Process
Discuss about the ADCO Construction Project Analysis.
The project selection process is very critical step which required utmost care and strategic planning if company wants to create value in its undertaken project. However, capital budgeting, top down analysis and trend analysis are some of the tools which could be used by company to analysis the project options available to it. It is analyzed that the selection of the construction project is highly appreciated due to the increased growth rate of the real estate business in Australia.
There are several cost management tools which could be used by company to control its cost and reduce the un-necessary expenses of the business. It is analyzed that company could use ABC model costing, life cycle costing mold and absorption costing model to bifurcate h project cost in the different work process department. It will also reduce the total cost of the business in effective manner. This cost management tool determines the cost incurred on the business projects and identify whether the incurred cost would be in the control of the business or not. Due to the increased complexity of the construction project, it might be hard for the management of ADCO Construction to determine the operating and fixed cost associated with the project. Therefore, by using the proper cost management tool, ADCO Construction could determine the cost of its projects.
In order to finance the project selected, ADCO Construction needs to use the financial management technique. ADCO Construction could raise funds by using the equity capital, debt funding, and creation charge on its assets and plugging back funds in business. In this case, Company used equity funding to raise funds for the selected project. It was analyze that due to the less financial Leverage, ADCO Construction used high debt funding which eventually reduce the overall cost of capital and increased the return on capital employed of business.
However, below is the bifurcation of the sources of funding used to finance the new selected projects.
|
Types of funding |
% of the portion used to raise the capital |
|
Equity funding |
15% |
|
Debt capital |
40% |
|
Promoters investment |
20% |
|
Retained earning |
25% |
Winding up is the procedure to end the particular project due to negative factors or project is not viable in the market. In this case, ADCO Construction selected construction project to create value on its investment. However, there were several reasons which resulted to failure of the project undertaken such as less efficient capital management, no strategic planning, less availability of experienced staff or employed and increased cost of the construction. These are some of the major issues which had been faced by ADCO Construction and had to indulge in winding up of undertaken project. However, in some of the cases, if ADCO Construction meets its objective after undertaking the project also results to winding up of that project.
Cost Management Tools
These all above given projects were the reasons of failure of the project and resulted to the winding up.
After analyzing the business factors, it could be inferred that ADCO Construction did not face any environmental issues due to the positive work environment in Australia. The climate factor may have affected if ADCO Construction completed its project by 75% as it would be the ending stage in which constructed flats would need to be secured from the rain and heavy dust in the area.
- Proper strategic planning and cost control method should have been adopted by ADCO Construction to lower down its cost of capital.
- Financial management tools and experienced staff members would add value to the undertaken construction project.
- ADCO Construction should adopt proactive business planning to prepare the company active for its upcoming business losses and risk.
It is evaluated that Myer Company has increased its brand image by expanding its business on international level. However, in this report, viability of the new project would be assessed by using the capital budgeting tool.
Myer Company issued AUD $ 5 million equity capital in 2013 after that in 2016 company again issued share capital of AUD $ 212 million in 2016 to its shareholders.
Reason to raise capital by using equity capital
There are several reasons which have resulted to raising funds by using the equity share capital.
Myer Holding was having high financial leverage in its business so company cannot increase its debt portion to raise funds.
Issue of equity capital increases the equity portions which eventually lower down the financial leverage and manage the capital structure less risky in market.
Issue of capital is also the one of the best tool to increase the brand image on international level.
The below give table reflects the decrease in the equity capital of Myer in 2017.
|
Year |
2014 |
2015 |
2016 |
2017 |
|
Common stock (AUD $ in million) |
525 |
525 |
739 (Increased) |
739 (Stable |
|
Other Equity (AUD $ in million) |
(5) |
5 |
(7) (Increased loss) |
(5) |
|
Retained earnings (AUD $ in million) |
379 |
335 (Decreased) |
379 (Increased) |
342 |
|
Accumulated other comp… (AUD $ in million) |
(1) |
(3) |
(4) |
(3) |
|
Total equity (AUD $ in million) |
893 |
863 |
1108 |
1073 |
Reason of decrease in tis overall equity capital
Company had loss in its business which was set off with the retained earnings of last years.
The common stock portion also went down by 20% as compared to last year which resulted to decreased equity capital.
|
Computation of Free cash flow of Myer Company (AUD $ in million) |
|||||
|
Data |
Year |
Year |
Year |
Year |
Year |
|
Particular |
1 |
2 |
3 |
4 |
5 |
|
Total sales |
$ 5.50 |
$ 5.61 |
$ 5.72 |
$ 5.84 |
$ 5.95 |
|
(-) Variable Costs |
$ 2.20 |
$ 2.24 |
$ 2.29 |
$ 2.33 |
$ 2.38 |
|
Contribution |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-) Fixed Cost |
$ – |
$ – |
$ – |
$ – |
$ – |
|
Net Profit |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-)Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Net Profit before Tax |
$ 2.80 |
$ 2.87 |
$ 2.93 |
$ 3.00 |
$ 3.07 |
|
(-) Tax @40% |
$ 1.12 |
$ 1.15 |
$ 1.17 |
$ 1.20 |
$ 1.23 |
|
Net Profit after tax |
$ 1.68 |
$ 1.72 |
$ 1.76 |
$ 1.80 |
$ 1.84 |
|
(+) Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Cash Inflows |
$ 2.18 |
$ 2.22 |
$ 2.26 |
$ 2.30 |
$ 2.34 |
|
(+) Salvage Value |
9 |
||||
|
Working Capital |
2 |
||||
|
Free Cash Flows in Australian Dollars |
2.18 |
2.22 |
2.26 |
2.30 |
13.34 |
Myer Holding would have total AUD $ 13.34 million free cash flow in its business.
Cost of capital= 5%
|
Computation of Free cash flow of Myer Company (AUD $ in million) |
|||||
|
Data |
Year |
Year |
Year |
Year |
Year |
|
Particular |
1 |
2 |
3 |
4 |
5 |
|
Total sales |
$ 5.50 |
$ 5.61 |
$ 5.72 |
$ 5.84 |
$ 5.95 |
|
(-) Variable Costs |
$ 2.20 |
$ 2.24 |
$ 2.29 |
$ 2.33 |
$ 2.38 |
|
Contribution |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-) Fixed Cost |
$ – |
$ – |
$ – |
$ – |
$ – |
|
Net Profit |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-)Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Net Profit before Tax |
$ 2.80 |
$ 2.87 |
$ 2.93 |
$ 3.00 |
$ 3.07 |
|
(-) Tax @40% |
$ 1.12 |
$ 1.15 |
$ 1.17 |
$ 1.20 |
$ 1.23 |
|
Net Profit after tax |
$ 1.68 |
$ 1.72 |
$ 1.76 |
$ 1.80 |
$ 1.84 |
|
(+) Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Cash Inflows |
$ 2.18 |
$ 2.22 |
$ 2.26 |
$ 2.30 |
$ 2.34 |
|
(+) Salvage Value |
9 |
||||
|
Working Capital |
2 |
||||
|
Free Cash Flows in Australian Dollars |
2.18 |
2.22 |
2.26 |
2.30 |
13.34 |
|
*Present value factor @5% |
0.952 |
0.907 |
0.864 |
0.823 |
0.784 |
|
Present Value |
$ 2.08 |
$ 2.01 |
$ 1.95 |
$ 1.89 |
$ 10.45 |
|
Total Present values(A) |
$ 18.39 |
||||
|
(-)Cash Outflows |
|||||
|
Initial investment |
$ 10.00 |
||||
|
Working capital investment |
$ 2.00 |
||||
|
(+)Cost Of equipment |
$ 12.00 |
||||
|
Total(B) |
$ 12.00 |
||||
|
Net Present Value(A-B) |
$ 6.39 |
Canadian dollar depreciates against the AUD $ resulted to Canadian Dollar= AUD $= .95 million.
|
Computation of Net present value of Myer Company (AUD $ in million) |
|||||
|
Data |
Year |
Year |
Year |
Year |
Year |
|
Particular |
1 |
2 |
3 |
4 |
5 |
|
Total sales |
$ 5.50 |
$ 5.61 |
$ 5.72 |
$ 5.84 |
$ 5.95 |
|
(-) Variable Costs |
$ 2.20 |
$ 2.24 |
$ 2.29 |
$ 2.33 |
$ 2.38 |
|
Contribution |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-) Fixed Cost |
$ – |
$ – |
$ – |
$ – |
$ – |
|
Net Profit |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-)Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Net Profit before Tax |
$ 2.80 |
$ 2.87 |
$ 2.93 |
$ 3.00 |
$ 3.07 |
|
(-) Tax @40% |
$ 1.12 |
$ 1.15 |
$ 1.17 |
$ 1.20 |
$ 1.23 |
|
Net Profit after tax |
$ 1.68 |
$ 1.72 |
$ 1.76 |
$ 1.80 |
$ 1.84 |
|
(+) Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Cash Inflows |
$ 2.18 |
$ 2.22 |
$ 2.26 |
$ 2.30 |
$ 2.34 |
|
(+) Salvage Value |
9 |
||||
|
Working Capital |
2 |
||||
|
Free Cash Flows in Australian Dollars |
2.18 |
2.22 |
2.26 |
2.30 |
13.34 |
|
*Present value factor @5% |
0.952 |
0.907 |
0.864 |
0.823 |
0.784 |
|
Present Value |
$ 2.08 |
$ 2.01 |
$ 1.95 |
$ 1.89 |
$ 10.45 |
|
Total Present values(A) |
$ 18.39 |
||||
|
Canadian dollar to AUD |
0.95 |
||||
|
Total present cash inflow |
$ 17.47 |
||||
|
(-)Cash Outflows |
|||||
|
Initial investment |
$ 10.00 |
||||
|
Working capital investment |
$ 2.00 |
||||
|
(+)Cost Of equipment |
$ 12.00 |
||||
|
Total(B) |
$ 12.00 |
||||
|
Canadian dollar to AUD |
$ 11.40 |
||||
|
Net Present Value(A-B) |
$ 6.07 |
In this case, net present value will be changed to AUD $ 6.07 million.
It will impact the cash inflow as the cash outflow of the company is too high but it is less than the cash inflow so the changes in currency value will negatively impact the NPV.
It might impact the investment decision but due to the high net present value, it will give high % of acceptance level to Myer to accept this particular project.
This could be inferred that if Myer Holding undertakes this project then it will be benefited by at least AUD $ 6.07 million within five years even after deducting the losses arise due to present value factor. It is analyzed that Myer should accept this project if he is certain that there will be no more fluctuation in the exchange rate as given.
Conclusion
After analyzing all the detail, it could be inferred that Myer Company should accept this project to expand its business. However, if the Australian dollar strengthens over the Canadian dollar then it might negatively impact the NPV of company.
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