Financial Analysis
FINC 6001 Assignment 1
According to the NPV analysis, if the predicted cash flow is correct, opening the sixth restaurant could bring limited profit to the company. From where the investors sit, Lisa and Mark might reject the project. They could compare with other investment opportunities by NPV method. Meanwhile sensitivity analysis would be used for offering more information to explain the project. Due to the different data in year 1 and the rest of years, I separated the sensitivity calculation in to two parts for getting accurate change in NPV.
Firstly, the setting up cost is 85,000 including 5,000 the cost of old kitchen equipment. According to the conservative principle in the accounting theory, the fair value of the old machine actually is 5,000 rather than 20,000 (book value). Due to the market price of the machine is only one-quarter of original price, even it just has been used for one year, it is advisable for the managers to decide using the old but servable machine rather than purchasing a new one. On the other hand, the market price of the machine should be regarded as an opportunity cost. Selling the old machine could have brought 9,500 cash inflow to the company including the tax-related benefits which results from the difference between book value and market price. The formula is given by:
Cash inflow =selling price*(1-tax ratio) +residual book value*tax ratio = 5,000*(1-30%) + 20,000*0.3 = 9,500
When the top managers took the depreciation into account, they might be aware of the depreciation basis. Considering the operating nature of the restaurant, decoration cost should belong to the capitalized cost. Due to the decoration cost would make substantial improvement in building quality and result in potential economic benefits inflow. ‘The capitalized cost is an expense which could be added to the cost basis of a fixed asset on the financial
According to the NPV analysis, if the predicted cash flow is correct, opening the sixth restaurant could bring limited profit to the company. From where the investors sit, Lisa and Mark might reject the project. They could compare with other investment opportunities by NPV method. Meanwhile sensitivity analysis would be used for offering more information to explain the project. Due to the different data in year 1 and the rest of years, I separated the sensitivity calculation in to two parts for getting accurate change in NPV.
Firstly, the setting up cost is 85,000 including 5,000 the cost of old kitchen equipment. According to the conservative principle in the accounting theory, the fair value of the old machine actually is 5,000 rather than 20,000 (book value). Due to the market price of the machine is only one-quarter of original price, even it just has been used for one year, it is advisable for the managers to decide using the old but servable machine rather than purchasing a new one. On the other hand, the market price of the machine should be regarded as an opportunity cost. Selling the old machine could have brought 9,500 cash inflow to the company including the tax-related benefits which results from the difference between book value and market price. The formula is given by:
Cash inflow =selling price*(1-tax ratio) +residual book value*tax ratio = 5,000*(1-30%) + 20,000*0.3 = 9,500
When the top managers took the depreciation into account, they might be aware of the depreciation basis. Considering the operating nature of the restaurant, decoration cost should belong to the capitalized cost. Due to the decoration cost would make substantial improvement in building quality and result in potential economic benefits inflow. ‘The capitalized cost is an expense which could be added to the cost basis of a fixed asset on the financial