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Overhead expenses should be clearly taken in account if can bespecifically attributable to the “Super” project. Research says that“Super” will cover 80% market hence it may for sure require additionalmarketing and labour force effort. Hence the “Super” FCF shouldinclude over head expenses in the analysis.2.Expected incremental after tax cash flow of “Super” project (taxrate 52%)?Refer excel working sheet for the same
3.What are the NPV and IRR of the project? Should we use paybackperiod and AAR to evaluate the project as management does?NPV of the project is US$ 93.38 thousand and IRR is 12.59%. Paybackperiod and AAR doesn’t provide best estimate for capital budgetingprocess. Payback period only compute the time project will take in payingoff the initial outlay back. This method ignores the time value of moneyand not considers the inflow after payback period. This project is notsuitable to analysis single project. AAR is another non-discounted analysis technique for capital budgetingdecision making process. It is an accounting technique to measure theprofitability of the investment proposals. The Accounting Rate of Return(ARR) is calculated by dividing the Average annual profit after tax by theAverage investment. This method also doesn’t take into account the timevalue of money and further it also not recognise the inflow and outflow ofproject as it is based on accounting income.In case of single project analysis, both PBP and ARR fail to indicate thewhether an investment should be accepted or rejected. 4.How sensitive are these numbers (in question 3) to the decisionsyou made in question 1? Which decisions are particularlyimportant? Notice this requires you to figure out cash flows thatare not in Exhibit#6, and do some sensitivity analysis, even if youthink Exhibit#6 is correct?As my analysis is totally based on NAV of the project hence the decisionmade in question1 is important. For instant if we assume that we want toconsider the test marketing expense and cost pertain to capacity andfacility of existing “Jell-O” product in the computation. It will increasethe cost of the product and further the NPV of the project will comedown.