Discuss About The Transport Investment Economic Performance?
The overall calculation depicted in question 1, directly helps in providing relevant expenses and income that will be generated from the new project. This evaluation could eventually help the board of directors to make a relevant decisions regarding commencement with the new product, which would help in improving return from investment. The evaluation states the overall expenses such as wage rate, factory overheads, part replacement, inventory increment, advertisement expenses, depreciation, Salvage value, interest on loan and raw material expenses are detected from the overall income generated from sale of the new product.
Relevant recommendations are relatively provided to board of directors of the company, which directly help in identifying viability of the investment. The overall evaluation is also conducted for both with and without the contract manufacturing sales for deriving viability of the new project (Fokkema, Buijs and Vis 2017). The inclusion of the overall contract manufacturing sales on the evaluation for detecting viability of the project directly helps in identifying the NPV as $1,734,552.42, payback period of 2.39 years, and IRR as 46%. This mainly depicts the overall viability of the project for providing higher returns from investment in future. Furthermore, the overall positive NPV directly indicates that the project would eventually increase firm value in future. In this context, Gotze, Northcott and Schuster (2016) mentioned that Use of investment appraisal techniques directly allows the company to identify the viable project that could help in generating the highest return from investment.
From the overall evaluation, positive cash flow has been conducted from first year of the project, which directly increases with the relevant increment in expenses and income. Therefore, it is advisable for the board to accept the relevant project, which could directly help in increasing the relevant profitability from operations. Herbener and Rapp (2016) mentioned that with the help of investment appraisal techniques such as payback period, discounted cash flow, NPV and IRR organisation are able to detect viability of the investment.
There is a different evaluation, which also needs to be conducted by the board, where the project needs to be calculated without the contract manufacturing sales. This overall exclusion of the contract manufacturing sales could directly help in identifying the operational capability of the new project to provide relevant returns from investment. From the overall evaluation it can be identified that whole project without the contract manufacturing sales provides a NPV of $1,125,966.32, payback period of 2.8 years, and IRR of 36%. The relevant evaluation of the project without the contract manufacturing sales is viable, as it portrays of positive NPV and high IRR. This only indicates that the new project without the contract manufacturing sales is viable option for the board and could provide higher returns in future (Laird and Venables 2017). The project could also help in increasing the firm value by $1,125,966.32 if the management approves the overall new project.
There are different types of measures that need to be evaluated by the organisation before initiating the new project. The relevant evaluation of the future demand for the product needs to be conducted adequately, as it might help in detecting the overall revenues that could be provided from the new product. The second measure that needs to be evaluated is the overall cost of capital that is used for calculating the NPV, as it might help in generating the relevant returns from investment. Lastly, the overall expenses that needs to be evaluated, which is deducted from the revenue generated by the project, as it helps in adequately identifying viability of the project (Li and Trutnevyte 2017).
There are specific limitations that the company should have taken into consideration, which is the inflation rate that is fixed at 2%. The inflation rate needs to be evaluated adequately according to the future expectations and a constant inflation rate could directly decrease viability of the project. Hence, the company could consider a changing inflation rate to drive viability of the project. The second limitation is the estimation of the inventory level, which is defined by the logistics manager. This defined inventory level could directly affect the production and distribution capacity of the organisation. Therefore, the company needs to evaluate inventory level for supporting the demand for its product. Lastly, the wage expenses that is been evaluated in the case study also needs to be adjusted, as a constant increment in wage rate and number of employees could differ with the production changes and demand for labour. Hence, the company needs to evaluate the labour wage rate change, which is been conducted by the organisation.
Hence, after the overall evaluation of the project it could be recommended for the board to initiate the new project, as it might help in generating higher returns from investment. In both the situations, the NPV of the project is relatively positive and IRR is adequately higher than the cost of capital required for the project. Therefore, it directly indicates that the project is viable for the company, which could provide higher returns from investment in future. The relevant increment in profitability could be achieved by using the new project, where it could provide adequate returns for the next 6 years.
Fokkema, J.E., Buijs, P. and Vis, I.F., 2017. An investment appraisal method to compare LNG-fueled and conventional vessels. Transportation Research Part D: Transport and Environment, 56, pp.229-240.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-VERLAG BERLIN AN.
Herbener, J.M. and Rapp, D.J., 2016. Toward a Subjective Approach to Investment Appraisal in Light of Austrian Value Theory. Quarterly Journal of Austrian Economics, 19(1), p.3.
Laird, J.J. and Venables, A.J., 2017. Transport investment and economic performance: A framework for project appraisal. Transport Policy, 56, pp.1-11.
Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal pathways for the UK electricity sector transition to 2050. Applied Energy, 189, pp.89-109.
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