Ayr co financial appraisal

Document Type:Thesis

Subject Area:Finance

Document 1

To do this, the report will showcase the detailed calculations of various appraisal tools and techniques, analysis and evaluation of the investment projects options and recommend accordingly. Notably, the report will investigate economic and financial sense of each project by calculating the Net Present Value, the Internal Rate of Return, and Payback period(s) for both projects and advice accordingly. In a broader perspective, the report will also seek to delve into the long-term implications of each project by evaluating the available financing options considering the significant amount of capital outlay. Project Description and Objectives AYR Co considers two separate projects, Aspire and Wolf, each of which has the potential to increase the company’s market share. To this given date, the company has invested $120,000 in research and development in the quest to identify and prospect the plausible impact of each project and the overall change in demand to the company in the long-run.

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Project Wolf’s estimated cashflow stands at a constant $955,000 through out the project’s lifespan of 5 years. In the same fashion, the project has estimated material costs at $14,400 in the first year, and expected to rise at an annual inflation rate of 7. Further the project is expected to incur other expenses at $18,000 in the first year, expected to fall by a rate of 7. 5% per annum. In addition, the project has to take or acquire factory space that is generating constant rental income of $75,000 per annum. 6966 Year 1 2 3 4 5 Net cash Flow $650,000 $ 698,750 $751,156 $807,493 $868,055 Scrap Value 0 0 0 0 $375,000 Total Cash Inflow $650,000 $698,750 $751,156 $807,493 $1,243,055 X (present Value) 0. 6966 Present Value of Cash Flows $604630 $604,652 $604,681 $604,651 $865,912 Total Present value of cash inflows= $3,284, 526 Less initial investment ($2,250,000+140000) Net Present Value= $894, 526 Internal Rate of Return 0=CFo +CF1/ (1+IRR) +CF2/ (1+IRR)2 +……+ CFn/ (1+IRRn) = Years Cash In Initial Investment/ Variable Costs Net Cash flow 0 0 $2,390,000 -$2,390,000 1 $650,000 $27,000 $623,000 2 $698,750 $ 28,823 $669,927 3 $751,156 $30,769 $720,387 4 $807,493 $32846 $774,647 5 $868055 $35,063 $832992 TOTAL $3,775,454 $2,544,501 $1,230,953 Applying the excel function, this translates to 14.

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8155% or approximately, 14. Payback period- Evaluates the time with which the initial cashflow of a given investment is to be recovered from the cashflows generated by the investment. Cumulative cashflows Year Cashflow Cashflow 0 $2,390,000 $2,390,000 1 $650,000 $1,740,000 2 $698,750 $1,041,250 3 $751,156 $290,094 4 $807,493 $-517,399 5 $868,055 $-1,385,454 The payback period = A+ (B/C); Where A= The last period with a negative cumulative cashflow, B= The absolute value of cumulative cashflow at the end of period A, C= The total cashflow during the period after A. Notably, the project appraisals above put project Aspire in a progressive trajectory that captures the basic business expectation. For instance, the projection of cashflows make business and financial sense, in that, an annual 7. 5% rise not only captures the expected uncertainties associated with a new project, but also gives the business time to explore various avenue of increasing its market share.

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In the same fashion, the fact that project Aspire seeks to expand the current product range to appeal to existing and potential customers, the intrinsic value of its operations aligns with the existing company vision and mission. That, according to Magni and Marchioni (2018) showcases the projects profitability given a theoretical discount rate that a company might choose within a given period of the project’s life span. 35 years. Lefley (2018) observes that projecting financial appraisals for capital projects calls for comprehensive internalization of realistic figures since the actual rate of return at the end of the project’s lifespan tend to differ with the estimates. Thus, despite the cardinal rule of pursuing the project with higher internal rate of return, choosing the one that averagely challenges the company’s theoretical discount rate provides much chance of stronger growth.

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This will also help in the monitoring and evaluation processes to ascertain the progress, without much expectations. From a broader perspective, considering Project Wolf will need extra rental space for its operations, this would imply the company forfeiting $375,000 in rental income for 5 years; making Project Aspire more viable. This will have positive impacts to the investors in the long-run as profitability ensure streams of growth and value of the company. In the same fashion, if the directors choose to take a debt in form of a bank loan, the new level of long-term debt will stand in the excesses $20,250,000; subject to the fixed rate of interest. This option has an upper advantage compared to the equity option in the floatation costs which are generally lower compared to those of equity.

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