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The assignment discusses on investment proposal and capital structure of the company to assess the financial stability of the firm. The report covers different methods of capital budgeting techniques which are used to make a decision of acceptance of any project. It also highlights on maximizing of shareholders value by capital structure.
Nets cash flow before tax
Income before taxes
30% on Income tax
After tax net income
Add back depreciation
After tax cash flows
After tax salvage value
After tax total net cash flows
Annual sales for first year = $1,445,000 or $1.145 million
Annual expenses for 1st year $(900,000+ 210,000+ 46,000+ 25,000) = 1,181,000 or $1.181million
Revenue: increase 10 %
Expenses: 6% of 1,181,000= 1251,860
Depreciation = 1,650,000- 100,000/8= $193,750 or $0.19 million
Salvage value= $100,000-(100,000x 0.30) = $70,000
Worst case (units in millions)
Best case (units million)
Cumulative cash flow
Payback period formula= Initial Investment/Cash Inflow per Period
Payback period= 4+ (0.35/0.49)
= 4+0.71= 4.71 years
Payback period: In this case, the investments incurred gets negative value which represents that company might incur a huge loss on investments. In the third year, the income becomes and cash inflow stops within the company. Therefore, a shortfall of cash invested is difficult to recover from the company.
= 3+ (0.52/0.69) = 3+ 0.75= 3.75 years
Discounted cash flow
Discounted Cash Inflow = Actual Cash Inflow/ (1 + i)n
Discounted payback period= 7 + (0.071/0.259)= 7.27 years
In this scenario, the discounted payback period cannot be calculated due to shortfall of cash inflow.
Discounted payback period= 5+ (0.029/0.463)= 5.06 years
Present value (16%)
Total PV of cash flow: $1.838
Initial investment: $1.650
NPV= Total PV value- initial investment
NPV = 1.838-1.650 = $ 0.188 million
NPV: 1.650-0.421 = $ 1.229 million
Total PV of cash flow: 3.132
Initial investment: 1.650
NPV = 3.132 -1.650 = $1.482 million
PI= 1+ (NPV/Initial Investment)
Base case: 1+ (0.188/1.650) = 1.11
Worst case: 1+ (1.229/1.650) = 1.744
Best case: 1+ (1.482/1.650) = 1.898
Tax rate = 30%
Cost of debt: 2.06% (1- 30%) = 0.014 or 1.4 4%
Cost of Equity: risk free return+ beta (market return- risk free rate)
WACC= Cost of equity x cost of debt
WACC after tax = 0.50(1.14) + 0.50(8.38)
To conclude, the report gives a glimpse of capital budgeting techniques and capital structure methods helps the projects managers in taking decisions on investment proposal and estimates their return on investment. Therefore, the above analysis helps the managers to take correct decisions to fulfill their investment needs.
Capital-Investment. (2017, Sep). Capital Investment Appraisal / Appraisal Techniques. Retrieved Sep 2017, from https://www.capital-investment.co.uk: https://www.capital-investment.co.uk/capital-investment-appraisal.php
Agriculture and Consumer Protection. (2017, Sep). Investment decisions - Capital budgeting. Retrieved Sep 2017, from https://www.fao.org: https://www.fao.org/docrep/w4343e/w4343e07.htm
APN Outdoor Group Limited . (2016). 2016 Annual Report. Retrieved Sep 2017, from https://investors.apnoutdoorcorporate.com: https://investors.apnoutdoorcorporate.com/Investor-Centre/?page=Financial-Reports
Tijdhof, L. (2017, sept). WACC: Practical Guide for Strategic Decision-Making – Part 1. Retrieved sep 2017, from https://zanders.eu/: https://zanders.eu/en/latest-insights/wacc-practical-guide-for-strategic-decision-making-part-1/
VAIDYA, D. (2017, Sep).Capm Beta – Definition, Formula, Calculate Beta In Excel. Retrieved Sep 2017, from https://www.wallstreetmojo.com: https://www.wallstreetmojo.com/capm-beta-definition-formula-calculate-beta-in-excel/
WSJ. (2017, Sept). APN Outdoor Group Ltd. Retrieved Sep 2017, from https://quotes.wsj.com/: https://quotes.wsj.com/AU/XASX/APO/financials
WSJ. (2017, Sep). Enero Group Ltd. Retrieved Sep 2017, from https://quotes.wsj.com: https://quotes.wsj.com/AU/XASX/EGG/financials
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