Calculating Market Return and Net Present Value in essay.

1. Calculate the following using the data from Yahoo Finance (https://au.finance.yahoo.com/) for the company you selected for Question 1 of Assignment 1.

1. Calculate the daily market return over the last five years from the daily prices, calculate the monthly returns from the daily returns, and calculate the yearly returns from the monthly returns.

2. Calculate the total risk (i.e. yearly standard deviation of the daily returns).

3. Calculate the yearly systematic / market risk using the daily returns of the stock and daily return of the market index.

4. Calculate the unsystematic risk / firm specific risk. Suggest whether this company is a good investment. Answer the following questions while making your suggestion.

a) What is the basis for selection of this stock if you suggest this as a good investment? b) Would you invest all your money into this stock? If not, why not? How will you address this concern?

Question 2 Capital Budgeting

Requirements:

1. Compute the initial investment outlay, operating cash flow over the project’s life, and the terminal-year cash flows for ABC’s expansion project.

2. Determine whether the project should be accepted using NPV analysis.

3. Do the sensitivity analysis using different levels of change (e.g. 2%, 5% and 10% increase and decrease) of each of the key inputs (e.g., sales, variable costs and cost of capital)

4. Identify the most sensitive factor

5. Perform the scenario analysis

Market Return Calculation

The average daily return is 0.13%, monthly return is 4% and the yearly return -1.18437.

The stock is selected for investment after analyzing the return that the stock gives in short, medium and long term. The risk associated with the stock is compared with the return it offers and based on the comparison of the risk and return the shares are selected. In this stock, the risk associated with the stock is low but the return associated with the stock is significantly low in daily and yearly. Therefore based on this evaluation it can be said that investment should not be made in the stock of Australian pharmaceutical industry (Thow et al., 2015).

The investment should be diversified so all the money should not be invested in one stock. In order to reduce the overall risk it is advised that the investor should diversify investment and make a balanced portfolio. This can be done by making investment in different types of instruments that have different level of risk. The risk taking ability of the investor should be assessed so that investment can be made in the appropriate securities (Butlin, 2013).

Statement showing Initial investment, operating cash flow and terminal year cash flow
Particulars	Year 0	Year 1	Year 2	Year 3	Year 4
Initial Investment
Building	AUD 24,000.00
Equipment	AUD 16,000.00
Investment in Working Capital	AUD 12,000.00
Initial Investment	AUD 52,000.00
Revenue
Sales		AUD 80,000.00	AUD 80,000.00	AUD 80,000.00	AUD 80,000.00
Profit on sale of Equipment					AUD 800.00
Total Revenue		AUD 80,000.00	AUD 80,000.00	AUD 80,000.00	AUD 80,800.00
Expenses
Manufacturing expenses		AUD 48,000.00	AUD 48,000.00	AUD 48,000.00	AUD 48,000.00
Fixed overhead		AUD 10,000.00	AUD 10,000.00	AUD 10,000.00	AUD 10,000.00
Depreciation		AUD 3,800.00	AUD 3,800.00	AUD 3,800.00	AUD 3,800.00
Loss in sale of building					AUD 6,600.00
Total Expenses		AUD 61,800.00	AUD 61,800.00	AUD 61,800.00	AUD 68,400.00
Profit before tax		AUD 18,200.00	AUD 18,200.00	AUD 18,200.00	AUD 12,400.00
Tax @40%		AUD 7,280.00	AUD 7,280.00	AUD 7,280.00	AUD 4,960.00
Profit After Tax		AUD 10,920.00	AUD 10,920.00	AUD 10,920.00	AUD 7,440.00
Add:
Depreciation		AUD 14,720.00	AUD 14,720.00	AUD 14,720.00	AUD 11,240.00
Operating cash flow		AUD 25,640.00	AUD 25,640.00	AUD 25,640.00	AUD 18,680.00
Realization of assets					AUD 19,000.00
Terminal cash flow					AUD 37,680.00

Table 1: Cash flow statement

(Source: Created by Author)

The table above shows that the initial investment outlay for the project is AUD52000.00. The table highlight the operating cash flow of each year and the terminal year cash flow.

Calculation relating building
Particulars	Amount
Building	AUD 24,000.00
life	40.00
Depreciation	AUD 600.00
Book value	AUD 21,600.00
Market value	AUD 15,000.00
Profit /(loss)	AUD (6,600.00)

Table 2: Building

(Source: Created by Author)

Calculation relating Equipment
Particulars	Amount
Building	AUD 16,000.00
life	5.00
Depreciation	AUD 3,200.00
Book value	AUD 3,200.00
Market value	AUD 4,000.00
Profit /(loss)	AUD 800.00

Table 3: Equipment

(Source: Created by Author)

Statement showing Net Present Value of the Project
Particulars	Year 0	Year 1	Year 2	Year 3	Year 4
Cash flow during the year	AUD (52,000.00)	AUD 25,640.00	AUD 25,640.00	AUD 25,640.00	AUD 37,680.00
Discounting factor @12%		0.892857143	0.797193878	0.711780248	0.635518078
Discounted Cash flow	AUD (52,000.00)	AUD 22,892.86	AUD 20,440.05	AUD 18,250.05	AUD 23,946.32
Net Present value	AUD 33,529.27

Table 4: NPV

(Source: Created by Author)

The table above shows the NPV analysis of the project. The NPV of the project is positive hence the project should be accepted.

Price Sensitivity Analysis
	AUD 80,000.00	AUD 33,529.27
2%	AUD 81,600.00	AUD 34,199.86
5%	AUD 84,000.00	AUD 35,205.74
10%	AUD 88,000.00	AUD 36,882.20
-2%	AUD 78,400.00	AUD 32,858.69
-5%	AUD 76,000.00	AUD 31,852.81
-10%	AUD 72,000.00	AUD 30,176.35

Table 5: Price Sensitivity Analysis

(Source: Created by Author)

Variable cost Sensitivity Analysis
	AUD 48,000.00	AUD 33,529.27
2%	AUD 48,960.00	AUD 34,199.86
5%	AUD 50,400.00	AUD 35,205.74
10%	AUD 52,800.00	AUD 36,882.20
-2%	AUD 47,040.00	AUD 32,858.69
-5%	AUD 45,600.00	AUD 31,852.81
-10%	AUD 43,200.00	AUD 30,176.35

Table 6: Variable cost sensitivity analysis

(Source: Created by Author)

Discounting factor Sensitivity Analysis
	0.12	AUD 33,529.27
2%	0.14	AUD 39,117.49
5%	0.19	AUD 53,088.02
10%	0.29	AUD 81,029.08
-2%	0.27	AUD 75,440.87
-5%	0.22	AUD 61,470.34
-10%	0.12	AUD 33,529.27

Table 7: Discounting factor sensitivity analysis

(Source: created by Author)

The sensitivity analysis studies the uncertainty of output due to variability of the inputs. In the given case, the output is net present value and it is analyzed in terms of different output. The sensitivity analysis helps to identify the most sensitive factor. The analysis shows that the net present value is most sensitive to the cost of capital.

The scenario analysis shows the performance in the best case and the worst-case scenario. In the given case, a scenario analysis conducted by determine the Net present value in the two scenario of the cost of capital. In the best-case scenario, the cost of capital is taken as 10% and it is seen in that case the NPV of the project is $37498.83. In the worst case scenario the cost of capital is taken as 14% and the NPV of the project in such case is $29836.23. The table below shows the scenario analysis:

Scenario Analysis
Year	Cash Flow	Best case Scenario (10%)		Worst case Scenario (14%)
		Discounting factor	Net cash flow	Discounting factor	Net cash flow
0	AUD (52,000.00)	AUD 1.00	AUD (52,000.00)	AUD 1.00	AUD (52,000.00)
1	AUD 25,640.00	AUD 0.91	AUD 23,309.09	AUD 0.88	AUD 22,491.23
2	AUD 25,640.00	AUD 0.83	AUD 21,190.08	AUD 0.77	AUD 19,729.15
3	AUD 25,640.00	AUD 0.75	AUD 19,263.71	AUD 0.67	AUD 17,306.27
4	AUD 37,680.00	AUD 0.68	AUD 25,735.95	AUD 0.59	AUD 22,309.58
Total NPV			AUD 37,498.83		AUD 29,836.23

Table 8: Scenario Analysis

(Source: Created by Author)

References

Butlin, N. G. (2013). Investment in Australian economic development, 1861-1900. Cambridge University Press.

Thow, A. M., Snowdon, W., Labonté, R., Gleeson, D., Stuckler, D., Hattersley, L., ... & Friel, S. (2015). Will the next generation of preferential trade and investment agreements undermine prevention of noncommunicable diseases? A prospective policy analysis of the Trans Pacific Partnership Agreement. Health Policy, 119(1), 88-96.

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