NPV Analysis

Author: Adam Oliver

Institution: Financeassignmentshelp.com

Contents
Introduction ………………………………………………………………………………………………………………..    3
Analysis & Discussion ……………………………………………………………………………………………….     3
Case Scenario Description………………………………………………………………………………………..     3
Net Present Value Analysis of the Kenyan Project…………………………………………………………   3
Conclusion…………………………………………………………………………………………………………………..    6
References…………………………………………………………………………………………………………………..    7

Introduction

Management of project is the most important aspect that associated with an organization. It is extremely essential for an organization to manage the project in an effective manner, otherwise it will becoming very difficult for them to manage the things accordingly. Management is a synergy of four things which are planning, organizing, leading and controlling. It is becoming very imperative for the organizations to have the cost and benefit analysis of the company to leap over the benefits (Brigham, 2013).

Every organization strives hard for the economic expansion, and it is possible only if they companies will become able to mitigate the expenses in a perfect manner. Technology has now emerged as the most important aspect that has a direct impact over the financial position of the companies, along improving the operational aspect of the company. Information technology (IT) is basically a combination of two things which are information and technology. It means that the utilization of technology for passing on the information. Economic Analysis includes the analysis of the financial structure along with the analysis of the responses of the Capital Budgeting Stance.

Capital Budgeting includes the analysis of the Net Present Value (NPV) and other important aspects in particular (Coombs, 2002). The main perspective of this assignment is to perform an economic analysis of the sugar production on the Kenyan Coast. There is a case already submitted with this particular assignment with an assumption over the initial cost and the yearly income. The assignment is divided into three different aspects which are introduction, analysis & discussion and conclusion.

Analysis & Discussion

Case Scenario Description

The case shows that there is a Kenyan organization which is wishing to invest in the agriculture industry. It is assume that the initial investment of the project is 8,000$, while per year income is 1200$. There are different scenarios that will be consider to complete this analysis which includes the cost of capital of 5%, 10%, 15%, 20% and 25%. It is assume that the project will deliver positive cash flow throughout its life that will create economic and strategic well-being and prosperity for the company as a whole. The main rationale behind the selection of five different level of Weighted Average of Cost of Capital (WACC) is clear as it will have the sensitivity of the project.

Net Present Value Analysis of the Kenyan Project

According to the main theme of this report, it is likely to implement the factor of the analysis on the proposed project, to get an idea about the feasibility of the project for the company. NPV is one of the most powerful and widely used methods specifically come under the ambit of Capital Budgeting or Investment Appraisal. Investment appraisal is a perfect technique that used by the companies to have an increment within the investment of a company or a project (Griffin, 2009).

Theoretically, Net Present Value determines the future value of the project by discounting the same on the current WACC of the company. NPV is known as the most effective and widely used method that comes under the ambit of capital budgeting so that the companies can reach over the final decision about the selection of the company. The analysis of the WACC of the company has been analyzed into three different steps. In the initial first step, the initial investment capital has been analyzed in a perfect manner. The Capital Investment which the company is trying to propose in this scenario is $ 8,000. From this particular analysis of the Capital Investment, it is more than clear that the benefits that associated with the initial investment will gain positive attention in the seven years of operations. It is showing that the payback period of this particular project is 6 years and some months for the undiscounted cash flow. It is clear that this particular project will be paying off completely in the six years of operations. This particular aspect is clearly showing that payback of the project is placed on a lower scale which will be essential for the sake of the company in particular. Management of project is becoming very significant and effective for the companies in all over the world, as it is the only thing that has the tendency to let the companies about the feasibility of the project. The best part that associated with this particular technique is that it will give a thorough and good idea to the management of the company that in how many years or months they will become able to pay off the initial outlay. On the other hand, there is a disadvantage as well with this particular investment appraisal technique. Payback Analysis cannot predict the financial feasibility of the company like other investment tools. Management of an organization always concerned with the financial perspective rather than gaining an information about the paying off the money in the end of the day. Therefore, this particular method might not be attractive for Kenyan Coast, because it will not affect over the financial position of the company in particular. However, if the management of the company consider this particular information and analytical measure then it will certainly be effective for Kenyan Coast. In terms of economic consequences, this particular tool might not be effective, and it will not affect over the financial well-being of the company. It is recommended to the management of Kenyan Coast to consider some other measure for the same account to assess the level of feasibility of this project for the sake of the Kenyan Coast. The other measure which has been considered for the same assignment is Net Present Value (NPV).

In the light of Moyer, (2008), the most traditional and authentic method that used by the companies for analyzing the level of feasibility of their investment is Net Present Value (NPV), which has the ability to analyze the net worth of a project in the present time. The success and selection criteria of the NPV factor is that if the present value of the future cash flow is higher than the initial outlay of the company, the project should be consider by the for the investment purpose (Sheeba, 2010). The same criteria can be applied on the Kenyan Coast as well with the help of five different discounting periods. Each of the discounting periods will be analyzed against the NPV of the cash flow. The summary of the five NPVs is as follows in the form of a diagram.

A period of 50 cash flow payment has been considered for the completion of this part. The discounting period which has been selected for this part is 5%. It means that the future cash flow of the company will be decreasing by the same discounting factor and manner. All the present value of the cash flow for the Kenyan Coast will be discounted accordingly with the same cost of the capital. All the 50 future cash flows have been discounted on the prescribed discounted factor. From the entire analysis, it is found that the computed NPV for Kenyan Coast by considering the 5% of cost of capital or discount rate is “21,907”, which is comparatively higher than that of the initial outlay of $ 8,000. The percentage of increment in the case flow is more than 200%. This particular factor is in the favor of Kenyan Coast, and it is recommended to the management of the company to accept the same project for their effectiveness in the market, and to compete with other companies operating in the same line of business. From the aforementioned graph, the red line can be clearly seen which is representing the NPV of the project against the discounting amount considered for the same aspect.

The discounting period which has been selected for this part is 10%. It means that the future cash flow of the company will be decreasing by the same discounting factor and manner. All the present value of the cash flow for the Kenyan Coast will be discounted accordingly with the same cost of the capital. From the entire analysis, it is found that the computed NPV for Kenyan Coast by considering the 10% of cost of capital or discount rate is “11,898”, which is comparatively higher than that of the initial outlay of $ 8,000. The percentage of increment in the case flow is more than 100%. This particular factor is in the favor of Kenyan Coast, and it is recommended to the management of the company to accept the same project for their effectiveness in the market, and to compete with other companies operating in the same line of business. From the aforementioned graph, the green line can be clearly seen which is representing the NPV of the project against the discounting amount considered for the same aspect.

The discounting period which has been selected for this part is 15%. It means that the future cash flow of the company will be decreasing by the same discounting factor and manner. All the present value of the cash flow for the Kenyan Coast will be discounted accordingly with the same cost of the capital. From the entire analysis, it is found that the computed NPV for Kenyan Coast by considering the 15% of cost of capital or discount rate is “7,993”, which is comparatively lower than that of the initial outlay of $ 8,000. The percentage of increment in the case flow is almost 1%. This particular factor is not in the favor of Kenyan Coast, and it is recommended to the management of the company to not to accept the same project. From the aforementioned graph, the purple line can be clearly seen which is representing the NPV of the project against the discounting amount considered for the same aspect.

The discounting period which has been selected for this part is 20%. It means that the future cash flow of the company will be decreasing by the same discounting factor and manner. From the entire analysis, it is found that the computed NPV for Kenyan Coast by considering the 20% of cost of capital or discount rate is “5,999”, which is comparatively lower than that of the initial outlay of $ 8,000. The percentage of increment in the case flow is almost 25%. This particular factor is not in the favor of Kenyan Coast, and it is recommended to the management of the company to not to accept the same project. From the aforementioned graph, the blue line can be clearly seen which is representing the NPV of the project against the discounting amount considered for the same aspect.

The discounting period which has been selected for this part is 25%. It means that the future cash flow of the company will be decreasing by the same discounting factor and manner. From the entire analysis, it is found that the computed NPV for Kenyan Coast by considering the 25% of cost of capital or discount rate is “4,799”, which is comparatively lower than that of the initial outlay of $ 8,000. The percentage of increment in the case flow is almost 40%. This particular factor is not in the favor of Kenyan Coast, and it is recommended to the management of the company to not to accept the same project. From the aforementioned graph, the orange line can be clearly seen which is representing the NPV of the project against the discounting amount considered for the same aspect.

Conclusion

The aforementioned analysis of the NPV of the Kenyan Coast is showing that the Project will only be effective and subject to consider for them if the discount rate of the company will be based on the level of 5% and 10% only. Kenyan Coast has to make sure that the level of discount rate should be below than the level of 10% in particular. Only in this way, the company is entitled to consider the project for the investment purpose.

References

Brigham, E. F. (2013). Financial Management: Theory & Practice. London: Cengage Learning.

Choi, F. D. (2003). International Finance and Accounting Handbook. Houston: John Wiley & Sons.

Coombs, H. M. (2002). Public Sector Financial Management. Chicago: Cengage Learning EMEA.

Griffin, M. P. (2009). MBA Fundamentals Accounting and Finance. London: Kaplan Publishing.

Moyer, R. C. (2008). Contemporary Financial Management. Miami: Cengage Learning.

Sheeba, K. (2010). Financial Management. Pune: Pearson Education India.

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