The paper has found that the NPV was favourable and proved the project to be profitable. After financial analysis, impact on other project has been assessed. Any comments can’t be made on the same with given information. The research assessed strategic factors and provided recommendations…
Center of discussion in this paper is a financial analyst for Steel Tube division of Engineering Products Plc named Roger Davis. He is having a tough time convincing the management for a project proposal. The analysis by his accountant and the additional information obtained from other sources has added to his woes. Roger Davis needs to convince his managing director about the viability of a new proposal for computer numerically controlled (CNC) milling machine. The MD is not ready to spend money on the project unless it can start yielding profits within 3 years. However, the accountant’s analysis shows an overall loss for the project over the next 4 years. It won’t be prudent to expect much from the project after this period. Roger has collected a lot of additional information as well. But he has not been able to justify the viability of the project with given information. Most of the information available to Roger seems relevant at first sight. However, the consultant charges of £18,000 have already been paid by the company. Hence, they would not make much difference to the investment decision. Also acquiring opening stock at the beginning of the year rather than considering the same at year end would have minimal impact on the decision (the impact due to time value of money would be very small as compared to other numbers) and hence should be neglected for analysis. In addition there are pieces of information which don not directly reflect the performance of the project and must be excluded for a fair evaluation. They would be discussed in greater detail in section 5. 4. Cash flow Analysis using all additional information The accountant’s analysis was quite limited. Therefore, additional information collected by Roger needs to be incorporated in the financial analysis (Johnson, Derek). The same has been done in Table 4.1. The methodology for the same is discussed here. Table 4.1: Cash Flow Analysis using Accountant’s Analysis and Additional Information Year 0 1 2 3 4 Total Sales 400.00 600.00 800.00 600.00 Cost of Sales 180.00 300.00 380.00 300.00 Labour Cost 80.00 120.00 120.00 80.00 Revised Other production expenses 64.00 66.00 68.00 84.00 Depreciation 40.00 40.00 40.00 40.00 Administrative Overhead 54.00 76.00 74.00 74.00 Interest on loans 22.00 22.00 22.00 22.00 Total Cost 440.00 624.00 704.00 600.00 PBT -40.00 -24.00 96.00 0.00 PBDT 0.00 16.00 136.00 40.00 Depreciation for Tax purpose 60.00 45.00 33.75 25.31 Cumulative Depreciation for Tax purpose 60.00 105.00 138.75 164.06 PBT (for Tax purpose) -60.00 -29.00 102.25 14.69 PAT (for Tax purpose) -42.00 -20.30 71.58 10.28 Net profit (for company) -62.00 -25.30 77.83 24.97 Scrap sales 20.00 0.00 0.00 0.00 20.00 Cash benefits due to sell-off of existing machine 0.00 18.00 18.00 18.00 18.00 Additional advertising expenses -40.00 -8.00 -8.00 -8.00 -8.00 Consultant expenses -18.00 0.00 0.00 0.00 0.00 Reduction in sales of competing products -60.00 -60.00 -60.00 -60.00 Net cash flow -38.00 -112.00 -75.30 27.83 -5.03 ...
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