The overall report mainly focuses on identifying proposed production of confectionery that needs to be conducted by Riverlea. Furthermore, there are different types of situations that is used in the report, which could be helpful in identifying the viability of the new project. Adequate sensitivity analysis is conducted to detect whether the project's viability could be attained even after the revenue decline or increases in future. This could eventually help and depicting viability of the project.
The above table mainly helps in identifying the overall discounting rate that needs to be calculated to derive calculation of the calculations of NPV. The relevance CA p.m. evaluation is mainly conducted to identify the discounting rate, where risk free rate is identified at 5.05%, while the market return is calculated at 9.22% and beta is detected at 1.56. This overall valuation mainly helps in identifying the discounting rate of 11.55%, which could be used in evaluating the viability of the project. Baum and Crosby (2014) mentioned that companies use the discounting rate to derive the discounted cash flow which could be used in identifying the project viability.
Evaluation of the expected cash flows:
The above figure mainly helps in identifying the overall viability of the project, where relevant investment appraisal techniques are used such as NPV, IRR, payback period, and discounted payback period to detect viability of the project. Under normal circumstances the overall project mainly provides a NPV of $911,726, which is relatively positive and detect viability of the investment. Furthermore, the internal rate of return is identified to be 21.07 %, which is relatively higher than the cost of capital 11.55%. This mainly indicates that the overall returned from the investment is relatively higher, which could allow the organisation to reinvest the cash on another project and increase their return. The normal payback period is mainly calculated at 3.9 years, while the discounted payback period States 5.4 years. The overall evaluation of Payback period mainly detect that the whole capital is collected before completion of the project, which is a viable approach for the organisation. Hence, investment in the project could eventually allow Riverlea to generate higher return from investment. In this context, Gotze, Northcott and Schuster (2016) stated that use of adequate investment appraisal technique allows organisation to detect the most viable project, which could increase firm value in future.
Evaluation of the expected cash flow with 40% probability of 40% lowers incremental revenues:
The evaluation of the project under lower revenues also indicates a positive viability, which could allow the organisation to generate higher returns in future. The NPV valuation of the project under low revenue is $693,199, which is relatively positive and indicates a viable approach for the organisation. Moreover, the internal rate of return is also 19.31% and higher than the cost of capital indicating quick generation of cash that could be used by the organisation. Lastly the payback period is calculated at 3.9 years, while the discounted payback period is detected to be at 5.5 years, which is relatively higher than normal circumstances. Hence, under lower revenue the project of producing confectionery is a viable approach for Riverlea. On the contrary, Almarri and Blackwell (2014) argued that without adequate evaluation companies should not use the cost of capital, as it might project a wrong valuation of the investment and might decrease the anticipated returns.
Evaluation of the expected cash flow with 10% probability of 20% higher incremental revenues:
Moreover, evaluation of the project under higher revenue directly portrays a positive NPV of $939,042 with an IRR of 21.28%. This directly indicates the overall viability of the project, which could be obtained by Riverlea. Moreover the payback period is detected to be 3.9 years, while the discounted payback period is directed to be 5.4 years, which is relatively quicker than the normal circumstances. This directly indicates that incremental revenue could also provide higher returns to the company, we improve its revenue retention capacity. Hence, it could be identified that the project has viable approach, which might improve return from investment and allow the organisation to attain sustainable growth. On the other hand, Eliasson and Börjesson (2014) criticises that increment in inflation rate could directly have a negative impact on the returns provided by the project, which needs to be evaluated by the company before initiating the investment.
Concussion and Recommendations:
From the evaluation of the above calculation viability of the project for producing confectioneries can be detected. There are different types of calculation that are conducted for the project starting from detection of cost of capital, which was used for calculating relevant NPV of the project. After which adequate valuation of investment appraisal techniques such as discounted payback period, payback period and internal rate of return are conducted to detect viability of the project. Moreover, the calculation is conducted on different scenarios to detect viability of the project, which is identified to be a viable approach. This directly indicates that all the valuation conducted for the project has provided a positive view and could allow the organisation to commence with the project. Hence, Riverlea could commence with the production of confectioneries, which might help in improving future revenues of the organisation.
Therefore, it is recommended for the organisation to adequately start the production of confectioneries for generating higher revenue in future, as evaluated by the investment appraisal techniques.
Adequate evaluation of share price movement is mainly conducted of Riverlea, where the impact of the expected income generated by the company could be seen in its share price. Adequate findings are been conducted to detect the overall impact of the future cash flows that would be generated from the project. In addition, with the help of relevant graphs projected increment and actual increment are mainly evaluated to detect the relevant increase of share price. Furthermore, share price valuation on both adverse and positive circumstances is relatively evaluated to determine actual change in share price of the organisation.
Detecting whether the stock is semi-strong efficiency:
The above graphs and tables depict the relevant increment in share price of Reverlea, which is obtained during the announcement off the excess income that will be generated from the operation. For the more, from the evaluation it could be identified that market has reacted adequately on day 01, where 101% can be seen from the share price level of day 0. This directly indicates that the market have instantly reacted to the information regarding increased profits in future. According to the valuation that has been conducted in part 1 the overall increment and shares should only be around $3.10, whereas the share rose of $4.35 in day 01. This indicates that the shareholders have overestimated the value that would actually be generated from the increased revenue (Bodie 2013).
However, from the valuation of the price movement it could be identified that after day 01 till day 05 the share price as a relatively hovered between +2% and -2%. This directly indicates that share price correction is in progress and is taking relevant time. Hence it could be identified that semi strong efficient market is taking a relevant longer time to correct the overall valuation of company’s share price. Furthermore, from the valuation it could also be identified that from day -5 to day 0 share price of your organisation rules exponential. Moreover the relevant impact could be seen from day -2 to day -1, where relevant increment of 80% in share value can be detected. This directly indicates that relevant private information has been leaked, which resulted in a leap in share price. This directly indicates that the share is influenced by a strong form of efficient market (Liu, Wu and Yang 2017).
Depicting the trading strategy:
Short selling is mainly an adequate option for an investor as relevant incremental in share price can be seen due to announcements for higher revenue. Selling the share on day 0 and buying back on day 5 could eventually help in generating a return of 2.30% from the investment. However, from the valuation the share price should go till $3.10, where the profits will be around 28.76% in total. Therefore, adopting a short selling strategy could eventually allow the investors to generate higher return from investment for short duration (Hamid et al. 2017).
From the evaluation, it could be identified that shares of Reverlea have strong form of market efficiency, which led to the increment of share price. Therefore, the shares reflect semi strong efficiency market, which could be used by investors to adequately improve their return from investment. Moreover, the use of short selling strategy could eventually help in increasing relevant revenue for the investor from the price movement of Reverlea.
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