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Project Selection and Investment Appraisal Techniques

Discuss about the Project Selection Cost Management and Funding.

The significance of project selection, cost management, funding, Implementation and winding up for an organisation is depicted in the assessment. This relevantly helps in understanding the positive attribute of a particular project, which could help in generating high level of returns from investment. The evaluation also depicts the need of different investment appraisal techniques in detecting the financial viability of different projects

The above measure is mainly conducted for effectively selecting the adequate projects, which could increase return of the organisation. In addition, the use of investment appraisal techniques such as net present value, internal rate of return, profitability index and payback period are mainly an adequate instrument, which is used by organisations to maximise their profitability and minimise any kind of risk from investment. The use of investment appraisal techniques directly helps in detecting the project, which has the highest possible returns that could be generated from investment, while increasing firm value. The use of NPV technique direct helps in understanding time value of money, which could be used to maximise the level of profits from investment. In this context, Adrian, Covitz and Liang (2015) stated that companies by evaluating different project are able to understand the level of returns that could be provided from investment, which might increase firm value in future. On the other hand, Angeloni, Faia and Duca (2015) criticises that the wrong estimation of discounting rate directly has negative impact on the output provided by Net present value technique, which directly increases risk from investment. Construction and auto manufacturing companies mainly use investment appraisal techniques in detecting the financial viability of a project.

Companies with the help of cost management are mainly able to minimise any kind of excessive expenses incurred in their operations. In addition, the use of resource planning, cost estimating, budgeting, and cost control are an essential attribute of the cost management, which could have stricken expenses of the organisation. Moreover, the cost management helps in minimising the expenses incurred by the company in their daily operations by segregating different level of operations conducted by the company. The cost management also uses different level of budgeting measures, which might help in reducing the cost incurred from operations. Haz?r (2015) stated that companies using cost management structure can minimise the level of expenses, which could be conducted by organisations. On the other hand, Burtonshaw-Gunn (2017) criticises that the extensive use of budgeting measures might not help in minimising the level of expenses, whereas reduces the completion time of product.

Cost Management to Reduce Expenditures

Funding is mainly considered one of the major attribute for completing a particular project, as without adequate investment the project cannot start or is completed. The understanding of adequate level of funding, which is required for a particular project is essential for an organisation, as it determines their capability to support the particular project. In addition, this level of funding requirement mainly helps in depicting the financial requirements of a particular project. There are different spruces of funding, which could be used by the organisation such as external and internal source of finance. Hence, the use of banks loans, mortgage, share issue and retained earnings is mainly used by organisation for accumulating the required level of funds for supporting the projects, which could be generated from investment (Hopkin 2017). Both construction and auto manufacturing companies use bank loans and mortgages to fund their projects.

The implementation and winding up of a project is one of the essential measure, which is used by organisation for completing the project and acquiring the anticipated profits. In addition, companies during the implementation stage mainly utilises the viability of the project and compares the actual returns with anticipated returns. Winding up is used by companies when the organisation understands that the return from the project is not in line with the anticipated returns. After the completion of the project the company obtains salvage value of the machines and other equipment’s used in the project. This helps in creating short term investment benefits for the company, where extra income is generated after selling the leftover of the projects. Moreover, if there are environmental issues associated with the project then the organisation needs to wind up the project (Kendrick 2015).

Conclusion:

Companies with the help of adequate investment appraisal techniques and sources of finance are mainly able to initiate and complete the project. Therefore, from the evaluation it could be understood that the company might utilise adequate techniques to maximise their profitability and minimise any kind of risk from investment.

Myer currently does not have any kind of share issue on hand, as the company is facing problems related to their profit generation capacity. However, from the evaluation it is also identified that Myer is facing problems in their profits, which is directly affecting their capability to generate high rate of return from investment. This is directly affecting their share price, which has drastically declined from the levels of $4.10 in 2009 to $0.54 in 2018. Companies mainly raise equity capital for supporting their operations, which generate high level of return from investment. In addition, the use of equity capital could eventually help in supporting the required level of capital, which could be used in their expansion process and increase the level of income from investment (Hatch 2018).

The equity capital of Myer has mainly dropped in 2018 in comparison to 2009, where the overall market capitalisation of Myer dropped from 2.4 billion to 400 million in the current year. The company is mainly facing problems related to competition, which is directly affecting its capability to continue the operations. In addition, the company is also facing problems related to heavy discounting, customer foot traffic, challenging retail environment and online shopping (Phillips 2018).

Particulars

Value

Initial Investment

 CAD         10,000,000

Life of the store

5

Salvage value

 CAD           7,500,000

Sale value

 CAD           9,000,000

Profit

 CAD           1,500,000

Tax

40%

Year

0

1

2

3

4

5

Incremental revenue

 CAD  5,500,000.00

 CAD  5,610,000.00

 CAD  5,722,200.00

 CAD  5,836,644.00

 CAD    5,953,376.88

Cost

 CAD  2,200,000.00

 CAD  2,244,000.00

 CAD  2,288,880.00

 CAD  2,334,657.60

 CAD    2,381,350.75

Depreciation

 CAD     500,000.00

 CAD     500,000.00

 CAD     500,000.00

 CAD     500,000.00

 CAD       500,000.00

Salvage value

 CAD    7,500,000.00

Profit from store sale

 CAD    1,500,000.00

PBT

 CAD  2,800,000.00

 CAD  2,866,000.00

 CAD  2,933,320.00

 CAD  3,001,986.40

 CAD  12,072,026.13

Tax

 CAD  1,120,000.00

 CAD  1,146,400.00

 CAD  1,173,328.00

 CAD  1,200,794.56

 CAD    4,828,810.45

PAT

 CAD  1,680,000.00

 CAD  1,719,600.00

 CAD  1,759,992.00

 CAD  1,801,191.84

 CAD    7,243,215.68

Depreciation

 CAD     500,000.00

 CAD     500,000.00

 CAD     500,000.00

 CAD     500,000.00

 CAD       500,000.00

Working capital

 CAD    (2,000,000.00)

 CAD    2,000,000.00

Initial Investment

 CAD  (10,000,000.00)

Cash Flow in Canadian Dollar

 CAD  (12,000,000.00)

 CAD  2,180,000.00

 CAD  2,219,600.00

 CAD  2,259,992.00

 CAD  2,301,191.84

 CAD    9,743,215.68

Year

0

1

2

3

4

5

Cash Flow in Australian Dollar ($1 AUD will buy $1 Canadian dollars)

 AUD  (12,000,000.00)

 AUD  2,180,000.00

 AUD  2,219,600.00

 AUD  2,259,992.00

 AUD  2,301,191.84

 AUD  9,743,215.68

Discounting factor

                             1.00

                         0.95

                         0.91

                         0.86

                         0.82

                         0.78

Discounted cash flow

 AUD  (12,000,000.00)

 AUD  2,076,190.48

 AUD  2,013,242.63

 AUD  1,952,266.06

 AUD  1,893,196.22

 AUD  7,634,064.43

Cost of capital

5%

NPV in Australian Dollar

 AUD      3,568,959.82

Year

0

1

2

3

4

5

Cash Flow in Australian Dollar ($0.95 AUD will buy $1 Canadian dollars)

 AUD  (11,400,000.00)

 AUD  2,071,000.00

 AUD  2,108,620.00

 AUD  2,146,992.40

 AUD  2,186,132.25

 AUD  9,256,054.89

Discounting factor

                             1.00

                         0.95

                         0.91

                         0.86

                         0.82

                         0.78

Discounted cash flow

 AUD  (11,400,000.00)

 AUD  1,972,380.95

 AUD  1,912,580.50

 AUD  1,854,652.76

 AUD  1,798,536.41

 AUD  7,252,361.21

Cost of capital

5%

NPV in Australian Dollar

 AUD      3,390,511.83

After evaluating the above valuation, it could be advised to Myer for commencing with the project, as it will increase profitability of the organisation over time. In addition, implementation of the new project will eventually increase profit of the organisation, which would raise firm value in future. Therefore, it is recommended for the company to start the project, as it might help in improving its income in future (Sadgrove 2016).

Reference and Bibliography:

Adrian, T., Covitz, D. and Liang, N., 2015. Financial stability monitoring. Annual Review of Financial Economics, 7, pp.357-395.

Angeloni, I., Faia, E. and Duca, M.L., 2015. Monetary policy and risk taking. Journal of Economic Dynamics and Control, 52, pp.285-307.

Au.finance.yahoo.com. (2018). Yahoo is now a part of Oath. [online] Available at: https://au.finance.yahoo.com/quote/MYR.AX/ [Accessed 5 Jun. 2018].

Burtonshaw-Gunn, S.A., 2017. Risk and financial management in construction. Routledge.

Hatch, P. (2018). Myer profits slump as stocktake sale flops; shares hit all-time low. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/companies/myer-profits-slump-as-stocktake-sale-flops-shares-hit-all-time-low-20180209-p4yzsi.html [Accessed 5 Jun. 2018].

Haz?r, Ö., 2015. A review of analytical models, approaches and decision support tools in project monitoring and control. International Journal of Project Management, 33(4), pp.808-815.

Hopkin, P., 2017. Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Kendrick, T., 2015. Identifying and managing project risk: essential tools for failure-proofing your project. AMACOM Div American Mgmt Assn.

Kerzner, H., 2017. Project management metrics, KPIs, and dashboards: a guide to measuring and monitoring project performance. John Wiley & Sons.

Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research, 55(1), pp.197-233.

Olson, D.L. and Wu, D.D., 2017. Data Mining Models and Enterprise Risk Management. In Enterprise Risk Management Models (pp. 119-132). Springer, Berlin, Heidelberg.

Phillips, S. (2018). Shrink or die: the grim choice facing Myer. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/money/investing/shrink-or-die-the-grim-choice-facing-myer-20180227-p4z1xr.html [Accessed 5 Jun. 2018].

Sadgrove, K., 2016. The complete guide to business risk management. Routledge.

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