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Capital Budgeting Techniques

Discuss About The Management Simulation Optimization Complex?

The above study has been done to evaluate the performance of the new project of the company. For evaluating the performance of the company, capital budgeting techniques have been performed. Net profit value method is one of the capital budgeting method which explains about the total profit of the company after deductions which could be got by the organization or the investor after investing in a particular project. First of all, net profit value method have been analyzed and it has been found that the total cash flow of this investment proposal of the company is $ -3,16,449 which explains that the investment proposal would offer hug losses to the company so company should not accept this proposal.

On the other hand, the study has been done on internal rate of return. Internal rate of return method is one of the capital budgeting methods which explain about the total return of the company which could be got by the operations or the investor after investing in a particular project. This return is compared with the required rate of return of the company and better conclusion is made. Through the study, it has been found that the total rate of return of this investment proposal of the company is 21.34% which explains that the internal rate of return of the investment in quite higher than the required rate f return of the company which is 12.5%. It explains that the project should be accepted by the company.

At the same time, the study has been done on payback period of the company. Payback period method is one of the capital budgeting methods which explain about the total time of the company in which the total invested amount would be got back by the organization or the investor after investing in a particular project. Through the study, it has been found that the total period of cash back of this investment proposal of the company is 2 years which explains that the total invested amount would be get back by the company in 2 years. It explains that the project should be accepted by the company[1].

Lastly, the study has been done on accounting rate of return and profitability index of the company. Accounting rate of return method is one of the capital budgeting methods which explain about the total profit of the company after deductions which could be got by the organization or the investor after investing in a particular project. At the same time, profitability index method is one of the capital budgeting methods which explain about the total profitability level of company after deductions which could be got by the organization or the investor after investing in a particular project.

Net Profit Value

Through the study, it has been found that the total profit of this investment proposal of the company is 22% and 0.87 on the basis of accounting rate of return and profitability index which explains that the project should be accepted on the basis of ARR and must not be accepted on the basis of profitability index.

Thus, Dukeview Corporations Ltd must not accept this investment proposal as it is not profitable and the performance of the investment proposal is also not good. Further, the salvage value of the project is $ 240000 which would be get back by the company at the end of the 5 years and on the other hand, the loan amount would be given by the company every year. The total accounting of EMI would be $2,82,555 which explains that the performance of the project would not be profitable as the EMI amount is quite higher and the salvage value of the project is also lower. 

The above table explains that the net profit of the proposal is $ 51,12,435.71. Net profit value method is one of the capital budgeting methods which explain about the total profit of the company after deductions which could be got by the organization or the investor after investing in a particular project. The net profit value of the given case have been analyzed and it has been found that the total cash flow of this investment proposal of the company is $ 51,12,435.71 which explains that the investment proposal would offer great profit to the company so company should accept this proposal.

Sensitivity analysis study has been done further to evaluate the performance of the company. Two figures of the company has been changed which are sales price and sales unit. Following is the study of sensitivity analysis:

Table-1:Sales Units

NPV

% Change

Unit sales

 $  51,12,435.71

5%

                            1,50,150.00

5718492.216

10%

                            1,57,300.00

6324548.722

15%

                            1,64,450.00

6930605.228

20%

                            1,71,600.00

7536661.734

25%

                            1,78,750.00

8142718.241

Base value

                            1,43,000.00

5112435.709

-5%

                            1,35,850.00

4506379.203

-10%

                            1,28,700.00

3900322.697

-15%

                            1,21,550.00

3294266.191

-20%

                            1,14,400.00

2688209.684

-25%

                            1,07,250.00

2082153.178

Table-2: Unit price

NPV

% Change

Unit price

 $51,12,435.71

5%

 $             103.95

5718492.216

10%

 $             108.90

6324548.722

15%

 $             113.85

6930605.228

20%

 $             118.80

7536661.734

25%

 $             123.75

8142718.241

Base value

 $               99.00

5112435.709

-5%

 $               94.05

4506379.203

-10%

 $               89.10

3900322.697

-15%

 $               84.15

3294266.191

-20%

 $               79.20

2688209.684

-25%

 $               74.25

2082153.178

Table-3: Cost of capital

NPV

% Change

Rate

 $  51,12,435.71

5%

10.67%

5036033.517

10%

11.18%

5030905.366

15%

11.68%

5025745.757

20%

12.19%

5020554.582

25%

12.70%

5015331.732

Base value

10.16%

5041130.318

-5%

9.65%

5046195.876

-10%

9.14%

5051230.3

-15%

8.64%

5056233.698

-20%

8.13%

5061206.178

-25%

7.62%

5066147.848

Through the above study on sensitivity analysis, it has been found that the sensitivity analysis only look over changes in one variable at a time. Such as, in above case the different study has been done for sales units and sales prices[4]. Though, in case of scenario analysis, multiple changes could be accessed and studied at the same time. It makes it easy for the professionals to evaluate the project. Scenario analysis assists the managers and the companies to evaluate the case on three bases which are worst, best and base case. Further, it also assists the managers to make a better decision about the position and the profitability level of the project[5].

According to the current case of Curtis Industries Ltd, sensitivity analysis has helped the company to identify the total risk. According to the sensitivity analysis basis, the risk of the project is evaluated through calculating the scope in which the NPV (net present value) of the company would change with the changes into the related variables[6]. Further, it has been evaluated that there are various factors which affect the capital budgeting decision such as tax rate, interest rate, cost of sales, revenues, cash outflow, cash inflow etc. The overall NPV of the given project explains about the positive outcome which means the cash outflow of the project is lower than the cash inflow of the company. The return on investment of the project is according to the total risk of the project.

References:

Asongu, Simplice A. "Finance and growth: new evidence from meta-analysis." Managerial Finance 41.6 (2015): 615-639.

Bernanke, Ben, Kate Antonovics, and Robert Frank. Principles of macro economics. McGraw-Hill Higher Education, 2015.

Brooks, Raymond. Financial management: core concepts. Pearson, 2015.

Gitman, Lawrence J., Roger Juchau, and Jack Flanagan. Principles of managerial . Pearson Higher Education AU, 2015.

Iooss, Bertrand, and Paul Lemaître. "A review on global sensitivity analysis methods." Uncertainty management in simulation-optimization of complex systems. Springer, Boston, MA, 2015. 101-122.

Lawrence, J. Gitman. Principles of managerial finance. 2016.

ZUTTER, CHAD J. PRINCIPLES OF MANAGERIAL FINANCE, BRIEF+ MYLAB FINANCE WITH PEARSON ETEXT ACCESS CARD: Value... Edition. PRENTICE HALL, 20

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