SONICJET Company’s V-Powerboat Project: A Capital Budgeting Analysis

Cash Flows Analysis

Sonicjet Company is involved in the making of the powerboats and is considering various alternative approaches that are present. In that there will be a need for additional investment and the revenues which will be generated will also be different. It is required that all of that shall be analyzed and this will be done in the report presented below. In this, all of the information for the making of the analysis will be collected and with the use of that the cash outflows and inflows which are taking place will be determined. This will be in the interest of the company as the best approach will be selected. The process which will be undertaken for this will involve the use of capital budgeting approaches. The quantitative, as well as the qualitative analysis, will be performed and in that, all the areas will be covered. There are two options which are available and the performance of the evaluation will be in respect of them. There will be proper comparison which will be made by using the identified results. This will be providing help in making the final recommendation which will be beneficial for all.

Quantitative 

All of the cash flows which are made for the identified options which are the V and T powerboat are available and with the help of that the final cash flows which are made by the company are calculated (Govindan et al., 2015). The amounts which have been identified for the various years are as provided hereunder:

It can be noted in the table that all of the expenses which have been incurred for the project have been considered and in that, all the designing and promotion cost are also covered (Maravas and Pantouvakis, 2012). There is the plant that will be acquired and all of the impacts which will be made with that have been included. The impact of the depreciation has also been provided by which the tax benefit will be received. The working capital investment and its recovery are incorporated and by that, the net cash inflows which are available with the business are identified.

All of the identified results are further used for the performance of the calculation in the capital budgeting techniques. For that the rate of the return is identified at 20% and the same is taken into use (Mardani et al., 2015). The calculations for the same are provided in the appendix. In that, it is identified that the payback period of the V project is 4.01 which is less than the provided period of 4.5 years. This shows that recovery will be earlier than expected and it is good for the growth of the company as the amount can be invested further. The positive NPV is obtained for both the powerboats and they are at $3533760.2 and $2083361 for the V and T powerboats. The amount is more for the V powerboat and this is beneficial for the company.

Capital Budgeting Methods

The above-identified were the quantitative facts but the other theoretical aspects shall also be considered for the making of the decisions. It is identified that if the company will be choosing the V powerboat then it will be required to sacrifice the monthly earning which is currently made on that capacity (Li et al., 2017). It will be considered as the opportunity cost and will be important for decision making. The undertaking of the project requires the research which is made and all of the costs which are incurred for the same have been covered. There is the risk that will be involved in the same as various changes are made which may or may not be acceptable. It is identified that there is a decline in the sale which is taking place every year and proper consideration of that together with the reasons is required (Shrieves and Wachowicz Jr, 2001). The main cause of the same is identified to be high pollution due to the emission of excessive carbon. This will be harming the environment and that is a negative factor.

The market is competitive and in that, another option is also available which will be for the 6 years of duration. In that also the cash flows will be made and there will be a reduction in pollution (Kim, Shim and Reinschmidt, 2013). Due to this competition also the sale of the V powerboat is declining. The capital structure will have to be maintained and for that company is funding its requirements with both the equity and debt which will ensure the proper management of funds.

The analysis of the cash flows which are generated is made and with that, the net present value and payback period are also derived. It is ascertained that in both cases there is better performance with the V powerboat and it will have to be undertaken. There will need to make certain more additions by which the carbon emission can be reduced and it can be made environment-friendly. This is better than the expected requirements as the recovery of the cost will be made earlier in 4.01 years which will be making the additional benefits for the company. The available amount will help in generating the additional cash flows which will be enhancing the overall business performance.

In order to make the final decision, it is highly required that all the available options shall be compared with one another. In this comparison, there will be consideration of the results which are obtained with the performance of the calculations under capital budgeting. Detailed calculations are presented in the appendix. In that, the use of two rates has been made so that better decision making is initiated (Park and Jang, 2013). The rates which are used include 15% and 20% and with that, further calculation is made. In that, it is identified that with the decrease in the rate of return there will be an increase in the amount of the NPV which is obtained. The rate of 5% provides with the NPV of $5679023.7 and payback of 4.98 and at 20% with $3533760.2 and 4.01 years for the V powerboats.

Comparison of V-Powerboat and T-Powerboat Projects

The similar calculations are made for the T powerboat and in that the payback period is 3.51 and 4.36 and NPV is $4410967 and $2083361 at 15% and 20% respectively. With the help of the calculations, it can be noted that the position of the V powerboat is better as there is a higher amount of NPV which is made and also the recovery of the cost will be made in the earlier period (Žižlavský, 2014). This shows that the V powerboats should be manufactured and then the company will be able to attain all the targets which have been set by it.

Conclusion

The report presented above concludes that the financial analysis shall be made on the highest priority by which the proper decision making will be made possible. In that, all of the provided data is considered and there have been various calculations which have been made. The manner in which the cash flows are changing has been represented and with that, the amount which will be saved with the company every year is also fluctuating. The net present value and payback are calculated and with that, it is identified that the making of V powerboat will be undertaken as that will yield the higher returns.

References 

Govindan, K., Rajendran, S., Sarkis, J. and Murugesan, P. (2015) Multi criteria decision making approaches for green supplier evaluation and selection: a literature review. Journal of Cleaner Production, 98, pp.66-83.

Kim, B.C., Shim, E. and Reinschmidt, K.F. (2013) Probability distribution of the project payback period using the equivalent cash flow decomposition. The Engineering Economist, 58(2), pp.112-136.

Li, R., Chan, Y.L., Chang, C.T. and Cárdenas-Barrón, L.E. (2017) Pricing and lot-sizing policies for perishable products with advance-cash-credit payments by a discounted cash-flow analysis. International Journal of Production Economics, 193, pp.578-589.

Maravas, A. and Pantouvakis, J.P. (2012) Project cash flow analysis in the presence of uncertainty in activity duration and cost. International journal of project management, 30(3), pp.374-384.

Mardani, A., Jusoh, A., Nor, K., Khalifah, Z., Zakwan, N. and Valipour, A. (2015) Multiple criteria decision-making techniques and their applications–a review of the literature from 2000 to 2014. Economic Research-Ekonomska Istraživanja, 28(1), pp.516-571.

Park, K. and Jang, S.S. (2013) Capital structure, free cash flow, diversification and firm performance: A holistic analysis. International Journal of Hospitality Management, 33, pp.51-63.

Shrieves, R.E. and Wachowicz Jr, J.M. (2001) Free Cash Flow (FCF), Economic Value Added (EVA™), and Net Present Value (NPV):. A Reconciliation of Variations of Discounted-Cash-Flow (DCF) Valuation. The engineering economist, 46(1), pp.33-52.

Žižlavský, O. (2014) Net present value approach: method for economic assessment of innovation projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.

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