Answer To: Created: 12/08/2020 | Version: 1.0 Code: ACBUS204A Title: Business Finance Sem 2, 2020 Assessment 3:...
Shakeel answered on Oct 24 2021
1
Executive Summary
In this paper, the financial feasibility of project - SLX-2020, the ultimate solar storage system, is analyzed. Three capital budgeting tools – NPV, IRR and Payback period are used and by estimating all the relevant cost, revenue and Investment, the analysis suggests that project is financially feasible and one should proceed with it. Scenario analysis suggests that in the case of “worst scenario” project is not financially feasible, however, it is financially feasible in “Base case” and “Best case” scenario. Sensitive analysis suggests that project is highly sensitive to the discount rate and hence, company should restructure its capital to make the project successful. Further, the SWOT analysis is conducted to look at the strength, weaknesses, opportunity and threat to business and PESTLE analysis is done to analyze the different factors for long term survival of the business.
Table of Contents
Executive Summary 1
Introduction 3
Cost of Capital 4
Operating Cash flows 4
Feasibility Analysis 5
Payback period 5
Net present Value (NPV) 6
Internal rate of return (IRR) 7
Results 7
Scenario Analysis 8
Sensitivity Analysis 9
SWOT Analysis 10
PESTLE Analysis 11
Conclusion and Recommendation 12
References 13
Appendix 14
Introduction
Undertaking of the project is a part of company’s long terms strategy of growth and expansion. The business valuation is also significantly affected through undertaking of project. Hence, revenue and profit making is not the only motive but to enhance the value of the firm is also a major determinant for undertaking several projects. Before going with the project, it is ensure to test the feasibility of project through several dimensions (Maroyi, 2011). Apart from environmental, political and social dimensions, the financial dimension is most important through which a project must be evaluated (Atrill, 2009). A project needs huge capital outflow followed by cash inflow till the life of the project. Since, project so undertaken is generally having long term life and involves infusion of huge capital and resources, its financial feasibility is imperative for the successful completion of project. In the words of Kusuma (2012), “the financial feasibility analysis is a systematic evaluation of capital expenditure in relation to the expected income for a particular purpose of an investment decision”.
In this paper, the financial feasibility of project - SLX-2020, the ultimate solar storage system, is analyzed. Project is proposed by SOLGEN Z Limited that manufacturers and distributes hi-tech monocrystalline silicon/graphite encased solar storage panels to both domestic and global markets. The associated investment, costs and cash flows are estimated and then, the financial feasibility is tested through capital budgeting tools like – Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period. Further, the Scenario analysis and Sensitivity analysis are conducted to get in-depth insights for better cost controlling and successful completion of the project. A brief of SWOT analysis and PESTLE analysis are also conducted so a better management plan can be formed to tackle any difficulty in pursuing the project.
Cost of Capital
Company has three kinds of Capital – Ordinary shares, Preference Shares and Corporate bond. Their proportion or weights in capital is calculated as follows –
Weight of Equity
0.50
Weight of Preference shares
0.17
Weight of Bonds
0.33
Further, the cost of individual capital is calculated as follows –
Cost of Equity
16%
Cost of Preference shares
15.04%
Cost of Bonds
3.20%
The complete calculations for Cost of each capital are given in Appendix and Excel worksheet.
Hence, the overall Cost of capital, WACC is calculated by using the fomula - ∑ Wi*Ki, where Wi is the weight of individual source of capital and Ke is their respective cost.
The WACC is calculated at 11.61%
Operating Cash flows
Considering the Investment, costs and revenue, the operating cash flow is projected for next five years as follows –
Year
0
1
2
3
4
5
Initial Investment
-$33,000,000
NWC
-$5,000,000
Sales volume
5,000
5,500
4,950
4,455
4,010
Selling price
$11,000
$11,000
$11,000
$11,000
$11,000
Sales/Revenue
$55,000,000
$60,500,000
$54,450,000
$49,005,000
$44,104,500
Less:
Manufacturing cost per unit
$7,250
$7,250
$7,250
$7,250
$7,250
Total Manufacturing cost
$36,250,000
$39,875,000
$35,887,500
$32,298,750
$29,068,875
Fixed cost
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$1,000,000
Supervisor salary
$150,000
$150,000
$150,000
$150,000
$150,000
Depreciation
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
Profit before tax
$11,600,000
$13,475,000
$11,412,500
$9,556,250
$7,885,625
Tax @ 30%
$3,480,000
$4,042,500
$3,423,750
$2,866,875
Net Income
$11,600,000
$9,995,000
$7,370,000
$6,132,500
$5,018,750
Add:
Recovery of NWC
$5,000,000
After tax Salvage value of Plant & Equipments
$700,000
After tax Salvage value of land
$700,000
Depreciation
$6,000,000
$6,000,000
$6,000,000
$6,000,000
$6,000,000
Net Operating cash flow
-$38,000,000
$17,600,000
$15,995,000
$13,370,000
$12,132,500
$17,418,750
Note: The Research and Development costs of $4,000,000 and Market survey and Data research expenses of $5,00,000 are not taken into consideration because they are sunk costs and hence, irrelevant for our analysis.
Once, the cash flows are projected, the capital budgeting tools are used to analyze the financial feasibility of project.
Feasibility Analysis
The project’s feasibility is tested by three major capital budgeting tools – Payback period, Net Present Value (NPV) and Internal rate of Return (IRR).
Payback period
Payback period is the time period in which the Initial cash outlay is recovered during the life of the project. It is simplest and widely used method. To find the Payback period, the cumulative cash flows are calculated for each year and then, following formula is used –
Discounting Payback Period = A +
B
C
Where,
A is the last period when the cumulative cash flow turns to be negative;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A
Decision rule
If the calculated payback period is less than the pre-decided payback period, then project should be accepted otherwise rejected.
Net present Value (NPV)
When all the future cash flows associated with the project are discounted by an...