ACC00152 Business Finance Cost of Capital Increase
Questions:
Task:-
You to analyse the project and draft a memo to the Board of Directors providing recommendations, along with supporting analysis.
Diane has outlined three areas that you must cover in your memo:
- Estimation of the project’s base case NPV, with associated supporting detail;
- Recommendation on the project based on the base-case analysis;
- Recommendations on further analyses and factors that should be considered prior to making a final decision on ViewAll (but you do not have to undertake further analyses).
Table format for presenting numerical analyses is preferable. Ensure that readers will be able to easily follow what you have done. You may wish to use footnotes under tables that clarify calculations, details and/or assumptions where this is not clear from the table itself.
Answers:
Topic:-Recommendations for running Widget the View All service
The estimated analyses of the project’s base case NPV with associated supporting detail are depicted in calculations.
As per the new decision of running Widget with View All service the following table could be used for identifying viability of the project. In addition, old ways of selling the patent rights could only produce a profit of $10 million, while commencing with the project might generated a NPV of $13.30 million. The commencement of project could mainly help the company in generating higher revenue of 3.30 million. Thus, implementation of adequate project could mainly help the company in making additional profits after deducting total expenses conducted on operations (Baum & Crosby, 2014).
However, relevant factors could be identified, which might nullify the gains generated from the new projects. The assumed cost of capital if increased might reduce the overall NPV value or total present value of future incomes generated from the project. In addition, the increment in cost or decline in revenue could be a viable factor, which might hamper return projected for the investment (Throsby, 2016). The valuation of different factors could effectively help the management in making adequate decision for increasing firm value.
Calculations:
|
Year |
Cash inflow |
Adding net working capital |
Total cash flow |
Discounting factor |
Discounted cash flow |
|
0 |
$ (17,200,000) |
0 |
$ (17,200,000) |
1 |
$ (17,200,000) |
|
1 |
(1,000,000) |
0 |
$ (1,000,000) |
0.91 |
$ (909,091) |
|
2 |
12,500,000 |
0 |
$ 12,500,000 |
0.83 |
$ 10,330,579 |
|
3 |
15,440,000 |
0 |
$ 15,440,000 |
0.75 |
$ 11,600,301 |
|
4 |
12,500,000 |
0 |
$ 12,500,000 |
0.68 |
$ 8,537,668 |
|
5 |
200,000 |
$ 1,320,000 |
$ 1,520,000 |
0.62 |
$ 943,800 |
|
Present value |
$ 30,503,257 | ||||
|
Net present value |
$ 13,303,257 | ||||
|
Particulars |
0 |
1 |
2 |
3 |
4 |
5 |
|
Subscription |
150,000 |
200,000 |
220,000 |
200,000 |
120,000 | |
|
Price per subscription |
$ 30,000,000 |
$ 50,000,000 |
$ 55,000,000 |
$ 50,000,000 |
$ 30,000,000 | |
|
Vc cost per subscription |
$ 6,000,000 |
$ 8,000,000 |
$ 8,800,000 |
$ 8,000,000 |
$ 4,800,000 | |
|
Contribution |
$ 24,000,000 |
$ 42,000,000 |
$ 46,200,000 |
$ 42,000,000 |
$ 25,200,000 | |
|
fixed costs |
$ 10,000,000 |
$ 10,000,000 |
$ 10,000,000 |
$ 10,000,000 |
$ 10,000,000 | |
|
marketing costs |
$ 15,000,000 |
$ 15,000,000 |
$ 15,000,000 |
$ 15,000,000 |
$ 15,000,000 | |
|
Depreciation |
$ 2,000,000 |
$ 2,000,000 |
$ 2,000,000 |
$ 2,000,000 |
$ 2,000,000 | |
|
Profit before tax |
$ (3,000,000) |
$ 15,000,000 |
$ 19,200,000 |
$ 15,000,000 |
$ (1,800,000) | |
|
Tax |
$ 4,500,000 |
$ 5,760,000 |
$ 4,500,000 | |||
|
Profit After tax |
$ (3,000,000) |
$ 10,500,000 |
$ 13,440,000 |
$ 10,500,000 |
$ (1,800,000) | |
|
Depreciation |
$ 2,000,000 |
$ 2,000,000 |
$ 2,000,000 |
$ 2,000,000 |
$ 2,000,000 | |
|
Total cash inflow |
(1,000,000) |
12,500,000 |
15,440,000 |
12,500,000 |
200,000 | |
|
accounts receivable |
$ 3,000,000 |
$ 5,000,000 |
$ 5,500,000 |
$ 5,000,000 |
$ 3,000,000 | |
|
accounts payable |
$ 300,000 |
$ 400,000 |
$ 440,000 |
$ 400,000 |
$ 240,000 | |
|
Net working capital |
$ 2,700,000 |
$ 1,900,000 |
$ 3,160,000 |
$ 1,440,000 |
$ 1,320,000 |
Reference:
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Throsby, D. (2016). Investment in urban heritage conservation in developing countries: Concepts, methods and data. City, Culture and Society, 7(2), 81-86.
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