SBM1203 Venture/Project Economics and Finance Assignment help

SBM1203 Venture/Project Economics and Finance Assignment help

Introduction

In the report, the analysis of Baxil Electronics case will be done so as to analyze various investment related activities. The various models and theories related to finance will be looked upon so that the areas to attain profit can be determined. The IRR, payback period and various other factors of capital budgeting has been analyzed of case so that the actual return earned from investment can be resolute. With this the report will also indulge literature review of Baxil Electronics case so as to examine the factors that impact production of PDA.    

1.  Factors affecting the production of PDA

In the words of Bitar, et. al., (2018, pp.227-262), Personal Digital Assistant is a model where data are being put away. It is a capacity gadget which can really store the information and data to a lot of capacity. Baxil Electronics needs to really build up the model so as to really have the best electronic gadget in the market. Individual advanced partner is an exceptional thing with assortment of tropical shading with pre-modified music. Electronic things are constantly influenced by the adjustment in the innovation likewise with increment in the further developed innovation can additionally draw in the clients towards the utilization of the items (Shirvan, et. al., 2017, pp.811-825). Given that this is an electronic thing nearby can be a few components which can influence creation of PDA, for example, variations in the innovation, refreshing of the new-fangled highlights, along with increment in the opposition in the bazaar when this have constrained the Baxil to let behind their cost of the PDA.

According to Dumont, et. al., (2018, pp.294-306), Innovation assumes an indispensable job in influencing the PDA model. For this supportability, successful items ought to be delivered by the Baxil Electronics. In the present time, it is critical to continue in the market. So as to be best association with respect to the items, assembling of PDA may be impacted as of now it is giving fewer advantages to Baxil Electronics. Further author also suggested that for gaining more measure of benefit, Baxil Electronics may create great PDA model (VanderWeele and Ding, 2017, pp.268-274). It is on the grounds that the current PDA model has constrained highlights and inventiveness because of which Baxil Electronics is really confronting bunches of issues with respect to putting away the entirety of their information and proof. 

2. Methods available for evaluating the project

There are various methods that are existing for the appraisal of project in the organization so that the decision related to investments can be taken through the stakeholders. 

Net Present Value:

In the view of Gupta and Pradhan (2017), Net present worth is functional to the succession of ready money flows that are happening at distinct levels. The current value of the cash flows is totally reliant ahead the hiatus of time currently along with the cash flows. In Baxil Electronics, this tool can be used to determine the inflow as well as outpouring of cash.     

Payback Period:

Gupta (2017, p.45) suggested that payback period is one of the tool of capital budgeting which depicts the time mandatory to regain the burial exhausted in the speculation otherwise to achieve the breakeven point. This method will enable Baxil Electronics in determining the time period in which the value of investment can be recovered. 

Internal Rate of Return:

According to Hamdia, et. al., (2018, pp.95-109), IRR is the technique used to measure the estimated prosperity or revisit of the potential projects. Through this, Baxil Electronics will be able to analyze the rate of return which will be available on PDA. With this, it will also help in determining the viability and reliability of the project.     

Profitability Index:

Hofer, et. al., (2018, p.04017205), stated that profitability index is also known as profitability ratio which is the ratio of induces to the outlay for the planned project. It will help Baxil Electronics in ranking the project as it allows enumerating the sum of worth fashioned per element of savings.   

Annuity Method:

In the opinion of Maroyi and van de r Poll, (2012, p.9279), annuity method of depreciation is worn to examine the downgrading on the worth of assets by evaluating the rate of return. Baxil Electronics, through this method will establish the internal rate of return happening money inflows furthermore outflows of property.  

3. Payback period of the project

Working Notes:

Particulars Amount
Expansion of prototype750,000
Marketing revise200,000
Variable cost155
Fixed cost4,700,000
Unit price 360
Equipment (7 Years)21,500,000
Equipments Price (Annually)4,100,000

Sales volume
YearsAmount ($)
174,000
295,000
3125,000
4105,000
580,000

Depreciation Calculation
YearAmount & Depreciation
  $     21,500,000.00 
1 $       3,072,350.00 
2 $       5,265,350.00 
3 $       3,760,350.00 
4 $       2,685,350.00 
5 $       1,919,950.00 
Total Depreciation $     16,703,350.00 
Net asset amount $       4,796,650.00 

Value of sales =4,100,000

Loss on sale of equipment 

= $4,796,650 – $4,100,000

 = $696,650

Loss on tax benefit = $694,650 * 35% 

= $ 243,827.5

Net Sales= Sales + Tax Benefit 

= $4,100,000 + $243,827.5 

= $ 4,343,827.5

Cash Flow of the project:

ParticularsYear 0 ($)Year 1 ($)Year 2 ($)Year 3 ($)Year 4 ($)Year 5 ($)Year 6 ($)
Sales  $        74,000.00  $        95,000.00  $      125,000.00  $      105,000.00  $        80,000.00  
Revenue   $ 26,640,000.00  $ 34,200,000.00  $ 45,000,000.00  $ 37,800,000.00  $ 28,800,000.00  
Less: Variable cost ($155 per unit)  $ 11,470,000.00  $ 14,725,000.00  $ 19,375,000.00  $ 16,275,000.00  $ 12,400,000.00  
Less: Fixed cost  $   4,700,000.00  $   4,700,000.00  $   4,700,000.00  $   4,700,000.00  $   4,700,000.00  
Less: Depreciation  $   3,072,350.00  $   5,265,350.00  $   3,760,350.00  $   2,685,350.00  $   1,919,950.00  
Profit Annually  $   7,397,650.00  $   9,509,650.00  $ 17,164,650.00  $ 14,139,650.00  $   9,780,050.00  
Tax @ 35%  $   2,589,177.50  $   3,328,377.50  $   6,007,627.50  $   4,948,877.50  $   3,423,017.50  
Profit after tax  $   4,808,472.50  $   6,181,272.50  $ 11,157,022.50  $   9,190,772.50  $   6,357,032.50  
Add: Depreciation  $   3,072,350.00  $   5,265,350.00  $   3,760,350.00  $   2,685,350.00  $   1,919,950.00  
Cash flow after tax  $   7,880,822.50  $ 11,446,622.50  $ 14,917,372.50  $ 11,876,122.50  $   8,276,982.50  
Less: cost of assets $  21,500,000.00       
Less: working Capital  $   5,328,000.00  $   6,840,000.00  $   9,000,000.00  $   7,560,000.00  $   5,760,000.00  
Add: Salvage value net of tax      $   4,343,827.50  
Add: working capital unconfined   $   5,328,000.00  $   6,840,000.00  $   9,000,000.00  $   7,560,000.00  $ 5,760,000.00 
        
Cash flow $ (21,500,000.00) $   2,552,822.50  $   9,934,622.50  $ 12,757,372.50  $ 13,316,122.50  $ 14,420,810.00  $ 5,760,000.00 

Payback Period:

YearCash Variation ($)Cumulative  ($)
0 $           (21,500,000.00) $    (21,500,000.00)
1 $               2,552,822.50  $    (18,947,177.50)
2 $               9,934,622.50  $      (9,012,555.00)
3 $             12,757,372.50  $       3,744,817.50 
4 $             13,316,122.50  $     17,060,940.00 
5 $             14,420,810.00  $     31,481,750.00 
6 $               5,760,000.00  $     37,241,750.00 

Payback Period = 2.71 years

Commencing the higher than table it can be seen that the payback epoch of Baxil Electronics has been evaluated and the results depicts that the return on PDA will be received in 2.71 years (Shaban, et. al., 2017, pp.175-179). 

4. Profitability Index of Project

Required rate of return 12%

YearCash inflowDiscounting factor rate (12%)Present value
0 1 
1 $         2,552,822.50 0.892 $   2,277,117.67 
2 $         9,934,622.50 0.797 $   7,917,894.13 
3 $       12,757,372.50 0.711 $   9,070,491.85 
4 $       13,316,122.50 0.635 $   8,455,737.79 
5 $       14,420,810.00 0.567 $   8,176,599.27 
6 $         5,760,000.00 0.5066 $   2,918,016.00 
Total $ 38,815,856.71 

Profitability Index = 1.81

5. IRR of the project

YearCash inflow/Outflow
0 $        (21,500,000.00)
1 $            2,552,822.50 
2 $            9,934,622.50 
3 $          12,757,372.50 
4 $          13,316,122.50 
5 $          14,420,810.00 
6 $            5,760,000.00 

Rate of return= 18%

Expected return= 45%

IRR = 33%

6. Sensitivity in NPV for change in price

NPV when rate of return is 18%

NPV
YearCash inflow/Outflow
0 $     (21,500,000.00)
1 $         2,552,822.50 
2 $         9,934,622.50 
3 $       12,757,372.50 
4 $       13,316,122.50 
5 $       14,420,810.00 
6 $         5,760,000.00 

Rate of return = 18%

NPV= $9210418.07

Assuming increase in price by 10%

New price 

=360*110/100

=396 per unit

ParticularsYear 0 ($)Year 1 ($)Year 2 ($)Year 3 ($)Year 4 ($)Year 5 ($)Year 6 ($)
Sales   $          74,000.00  $        95,000.00  $          125,000.00  $      105,000.00  $        80,000.00  
Revenue ($396 per unit)  $   29,304,000.00  $ 37,620,000.00  $     49,500,000.00  $ 41,580,000.00  $ 31,680,000.00  
Less: Variable cost ($155 per unit)  $   11,470,000.00  $ 14,725,000.00  $     19,375,000.00  $ 16,275,000.00  $ 12,400,000.00  
Less: Fixed cost  $     4,700,000.00  $   4,700,000.00  $       4,700,000.00  $   4,700,000.00  $   4,700,000.00  
Less: Depreciation  $     3,072,350.00  $   5,265,350.00  $       3,760,350.00  $   2,685,350.00  $   1,919,950.00  
Profit earned annually  $   10,061,650.00  $ 12,929,650.00  $     21,664,650.00  $ 17,919,650.00  $ 12,660,050.00  
Tax Rate @ 35%  $     3,521,577.50  $   4,525,377.50  $       7,582,627.50  $   6,271,877.50  $   4,431,017.50  
Profit after tax  $     6,540,072.50  $   8,404,272.50  $     14,082,022.50  $ 11,647,772.50  $   8,229,032.50  
Add: Depreciation  $     3,072,350.00  $   5,265,350.00  $       3,760,350.00  $   2,685,350.00  $   1,919,950.00  
Cashflow after tax  $     9,612,422.50  $ 13,669,622.50  $     17,842,372.50  $ 14,333,122.50  $ 10,148,982.50  
Less: cost of assets $       21,500,000.00       
Less: working Capital  $     5,860,800.00  $   7,524,000.00  $       9,900,000.00  $   8,316,000.00  $   6,336,000.00  
Add: Salvage value net of tax      $   4,343,827.50  
Add: working capital released   $   5,860,800.00  $       7,524,000.00  $   9,900,000.00  $   8,316,000.00  $ 6,336,000.00 
Cash flow $     (21,500,000.00) $     3,751,622.50  $ 12,006,422.50  $     15,466,372.50  $ 15,917,122.50  $ 16,472,810.00  $ 5,760,000.00 

NPV when rate reduces to 12%

YearCash inflow/Outflow
0 $                                (21,500,000.00)
1 $                                   3,751,622.50 
2 $                                 12,006,422.50 
3 $                                 15,466,372.50 
4 $                                 15,917,122.50 
5 $                                 16,472,810.00 
6 $                                   5,760,000.00 
Rate12%
Net present value$22,152,408.08 

Sensitivity @ 12%

Particulars 
% change in NPV140.51
% Change in price10
Sensitivity 14.051

7. Sensitivity in NPV to change in the quantity sold

It has been assumed that there is 5% decrease in the quantity sold of new PDA

ParticularsYear 0 ($)Year 1 ($)Year 2 ($)Year 3 ($)Year 4 ($)Year 5 ($)Year 6 ($)
Sales   $        70,300.00  $        90,250.00  $      118,750.00  $            99,750.00  $        76,000.00  
Revenue ($360 per unit)  $ 25,308,000.00  $ 32,490,000.00  $ 42,750,000.00  $     35,910,000.00  $ 27,360,000.00  
Less: Variable cost ($155 per unit)  $ 10,896,500.00  $ 13,988,750.00  $ 18,406,250.00  $     15,461,250.00  $ 11,780,000.00  
Less: Fixed cost  $   4,700,000.00  $   4,700,000.00  $   4,700,000.00  $       4,700,000.00  $   4,700,000.00  
Less: Depreciation  $   3,072,350.00  $   5,265,350.00  $   3,760,350.00  $       2,685,350.00  $   1,919,950.00  
Profit earned annually  $   6,639,150.00  $   8,535,900.00  $ 15,883,400.00  $     13,063,400.00  $   8,960,050.00  
Tax rate @ 35%  $   2,323,702.50  $   2,987,565.00  $   5,559,190.00  $       4,572,190.00  $   3,136,017.50  
Profit after tax  $   4,315,447.50  $   5,548,335.00  $ 10,324,210.00  $       8,491,210.00  $   5,824,032.50  
Add: Depreciation  $   3,072,350.00  $   5,265,350.00  $   3,760,350.00  $       2,685,350.00  $   1,919,950.00  
Cashflow after tax  $   7,387,797.50  $ 10,813,685.00  $ 14,084,560.00  $     11,176,560.00  $   7,743,982.50  
Less: cost of assets $    21,500,000.00       
Less: working Capital  $   5,061,600.00  $   6,498,000.00  $   8,550,000.00  $       7,182,000.00  $   5,472,000.00  
Add: Salvage value net of tax      $   4,343,827.50  
Add: working capital released   $   5,061,600.00  $   6,498,000.00  $       8,550,000.00  $   7,182,000.00  $ 5,472,000.00 
Cash flow $  (21,500,000.00) $   2,326,197.50  $   9,377,285.00  $ 12,032,560.00  $     12,544,560.00  $ 13,797,810.00  $ 5,760,000.00 

Net present value
YearCash inflow/Outflow
0 $                                          (21,500,000.00)
1 $                                              2,326,197.50 
2 $                                              9,377,285.00 
3 $                                            12,032,560.00 
4 $                                            12,544,560.00 
5 $                                            13,797,810.00 
6 $                                              5,760,000.00 
Rate12%
Net present value$13,693,529.15 

Sensitivity Analysis

% change in NPV48.67
% Change in quantity-5%
Sensitivity -973.4

8. Decision to proceed with the investment during corona virus period

No, it can be said that it will not be fruitful to go with the speculation through the stage of corona virus due to the fact that doing investment in the new framework will require large amount of cost as well as finances. Individuals in economy are incurring a large amount of losses during the pandemic. The investment in new projects should be avoided but the existing projects needs to more enhanced and improved so that the overall success of the organization as well as business can be maintained in the market. 

Conclusion

From the above report it can be summarized that investment appraisal techniques plays an important role for taking the decisions related to investment. Baxil Electronics has used various tools in order to analyze the idea of investing into new PDA which depicted that the investment should be done in PDA as it will enable in proving the positive results in near future i.e 2.71 years which is approximately 3 years. Therefore, it can be said that for all the organization it is necessary to determine the practicality and helpfulness of project. 

References
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