Preview

Memo for financial analysis

Satisfactory Essays
Open Document
Open Document
520 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Memo for financial analysis
Memo
To: ABC Inc.
From: Hank
Date: September 30, 2013
Re: Problem 1&2&3

In the first problem, based on a careful study, the project will have the following performance:

a) The exact Payback Period is 4.62 years
b) The discounted Payback Period is 5.58 years
c) The Internal Rate of Return (IRR) of the machine is 13.87%
d) The Net Present Value (NPV) is $1,136,020.85
e) The Profitability Index (PI) associated with the project is 1.14

If we make decision based on NPV or IRR or PI, we should accept this project. This is because the project has a positive NPV, its PI over 1 and the IRR is more than the required rate of return. All of this factors mean that the project can actually benefit the company. However, since your company required that all the projects have a payback period of 2 years or less and a discounted payback period of 2.5 years or less, I recommend that you should reject this particular project. This is because the exact Payback Period and discounted Payback Period are 4.62 years and 5.58 years, which are far beyond the requirements. Therefore, the project should be reject.

I also make some sensitivity analysis and scenario analysis as you required. In the sensitivity analysis, you can see that the change of the price per unit has the greatest impact on the NPV. If the price per unit decreases by 10%, the NPV will be -694,837.57 and the IRR will be 7.59%, which means the project will make the company lose money on this investment. Based on your requirements, I also do a scenario analysis. You can see it in the appendix. Since you just require the NPV and IRR results, the others are not show there, you should notice that if you pretty sure that the good case may happen, you can accept the project. This is because in the best case, all your company’s requirements will be achieved and the NPV and IRR of the project will increase a lot (The NPV will be 14,907,810.60 and the IRR will be 54.06%). However, if

You May Also Find These Documents Helpful

  • Good Essays

    This report utilizes the base case analysis, worse case analysis and best case analysis feeling these analyses are sufficient, while many analyses may be of interest, they could confuse the recommendations and strategic value of the project. In preparation the board would be told that calculating multiple NPVs for multiple inflationary rates for labor cost and supply cost would further confuse the issue. The information presented the NPV, IRR, MIRR and payback times would be calculated and discussed. Additionally, a break even point would be calculated. The break even point calculation included in fixed cost would…

    • 495 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    The results of the analysis lend favourably towards accepting the investment project. First it is important to note that based on the after tax cost of borrowing and a risk premium of 3.75%, a discount rate of 8.89% was deemed appropriate for the project. The majority of the investment indicators used to value the project use discounted cash flows to determine the investment’s profitability. This technique allows for comparison amongst different investment opportunities available, as it provides the total return that is expected to be achieved over the project’s horizon in current dollar terms.…

    • 3248 Words
    • 13 Pages
    Powerful Essays
  • Satisfactory Essays

    Nucor Case

    • 342 Words
    • 2 Pages

    The first consideration about to undertake the investment is based on particular assumptions about the future, if we change those the result of the decision could also change. Due to the fluctuation of the market is difficult to make the right assumptions and this is why to calculate the NPV is not easy. For instance if we changed the discount rate and we lower it below the IRR, the resulting NPV will be positive and this case to invest in the new technology could be a profitable decision. We can also change the steel price rate keeping the cost rate constant, if it is increased enough the NPV could result positive, at the same time if we reduce cost rate keeping the price rate constant we can find an equal result.…

    • 342 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Ameritrade HBS Case

    • 334 Words
    • 2 Pages

    Do some sensitivity analysis of the NPV of each of these projects using different discount rates for the cash flows generated (try the discount rates from 2, 3 and 4 above as well as a few others). What is the appropriate discount rate for the technology project? What about the marketing project? Should they be undertaken? How sensitive is the decision to the discount rate (i.e. will small…

    • 334 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Business Memo-Accounting

    • 459 Words
    • 2 Pages

    I developed a spreadsheet including three budget schedules of Spiffy Shade Corporation, which is Production Budget, Direct-labor Budget, and Manufacturing Over-head Budget. According to the budget schedules, the company can plan ahead and meet the needs of demand. For example, form the Production Budget, the company can plan how many sunglasses should be produced for each month and quarter. Budget can also facilitating communication and coordination, and allocate resources. For example, from the schedules, the company can allocate the funds to different departments based on the budget. It can improve the correctness of the company’s decision. In addition, budgeting can control profit and operations, for instance, the company can compare the actual sales for a period against its budget sales. This can help the company evaluate the firm’s effectiveness in selling sunglasses. Thus to provide incentives for people to perform well and to make maximum profit for the company.…

    • 459 Words
    • 2 Pages
    Good Essays
  • Powerful Essays

    Financial Analysis

    • 1518 Words
    • 5 Pages

    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.…

    • 1518 Words
    • 5 Pages
    Powerful Essays
  • Satisfactory Essays

    Managerial Accounting

    • 380 Words
    • 2 Pages

    Project B has a lower net present value than Project A, but because of its lower capital investment, it has a higher profitability index. Based on its profitability index, Project B should be accepted.…

    • 380 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    FIN320 Excel Assignment

    • 388 Words
    • 4 Pages

    Calculate the Net Present Value (NPV) of the project. Should the firm accept or reject…

    • 388 Words
    • 4 Pages
    Satisfactory Essays
  • Good Essays

    To be able to analyze the project, we need to calculate the project’s NPV, IRR, MIRR, Payback Period, and Profitability Index.…

    • 991 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Through our analysis we found that the cost of capital of the project to be 13.487% and a Weighted Average Cost of Capital (WACC) to be at a value of 9.70%. Factoring in the WACC into our projections we found that if the demand maintains at an average rate the project will be at a positive Net Present Value of $5,997,505.31 with an IRR of 13.21%, a profitability index of 8.84, and an approximate payback period of 6.84 years. Please see Exhibits below for a snapshot of the capital budget and NPV values.…

    • 3279 Words
    • 11 Pages
    Good Essays
  • Better Essays

    In the two capital budgeting cases corporations (A and B) have different revenues values and expenses as well as variable depreciation expenses, tax rates and discount rates. The members of our team had to compute both corporate cases NVP, IRR, PI, Payback Period, DPP, and project a 5-year income statement and cash flow in a Microsoft Excel spreadsheet. The future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project's cost of capital and its risk is what’s needs to forecast the investment. Next, all of the asset's future positive cash flows are reduced into one current value number. Subtracting this number from the original cash expense required for the investment provides the net present value (NPV) of the investment. Using the internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings.…

    • 1072 Words
    • 4 Pages
    Better Essays
  • Better Essays

    Caledonia Project

    • 1283 Words
    • 6 Pages

    a. What is each project’s payback period? According to Financial Management: Principles and Applications Payback period is defined as “A capital-budgeting criterion defined as the number of years required to recover the initial cash investment” (Keown, Martin, Petty, & Scott, 2005, p. 292).…

    • 1283 Words
    • 6 Pages
    Better Essays
  • Satisfactory Essays

    The variables used to develop the table, including sales price, variable costs, unit sales, and the unit growth rate, are all most likely, or base-case, values, and the resulting $25,517 NPV shown in Part 5 is called the base-case NPV. Now we ask a series of "what if" questions: "What if unit sales falls 30 percent below the most likely level?" In our sensitivity analysis we hold the other variables at their base case levels and then examine the situation when the key variables change. Each new calculated NPV is plotted on the graph in Part 6 to show how sensitive NPV is to changes in each variable. The table below outlines the NPV figures that we used to construct the graph. The slopes of the lines in the graph show how sensitive NPV is to changes in each of the inputs: the steeper the slope, the more sensitive the NPV is to a change in the variable. From the figure and the table, we see the project's NPV is very sensitive to changes in the sales price, variable cost, and growth rate.…

    • 513 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    Keywords: NPV, NPV Profile, NPV, IRR, multiple IRRs, ranking conflict of NPV vs. IRR, payback period, profitability index, discount rate, cost of capital concept, cash flow analysis, cash flow timeline, conventional cash flow stream, non-conventional cash flow stream, sunk cost, opportunity cost, independent projects, mutually exclusive projects…

    • 1640 Words
    • 6 Pages
    Better Essays
  • Good Essays

    Financial Management Notes

    • 1499 Words
    • 6 Pages

    Accounting is a subset of financial management. Financial transactions must be recorded, classified, stored and eventually reported to the managers.…

    • 1499 Words
    • 6 Pages
    Good Essays