The Super Project Case

After review of the independent costs, we found that each one produces a positive NPV, an IRR above the discount rate and a payback period within the required ten years. However, it is unrealistic to consider these on an independent basis. For our realistic case, we included overhead expenses and the excess cost of capacity for the agglomerator. We did not include the erosion of Jell-O sales and the test market expense, as this is a sunk cost. Under these circumstances we produced the following results:

Free cash flows of the project for next five years can be calculated by adding depreciation values and subtracting changes in working capital from net income. In 2010, there will be a cash outflow of $2.2 million as capital expenditure. In 2011, there will be an additional one time cash outflow of $300,000 as an advertising expense. Using net free cash flow values for next five years and discount rate for discounting, NPV for the project comes out to be $2907, 100. The rate of return at which net present value becomes zero i.e.

The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.

Whole Foods is most likely to finance the investment project through equity and debt. The corporation is taking on a capital budgeting project which involves planning and managing long-term investments. The financial manager studies the investment opportunities that would guarantee the company future success. Financial managers help the company to analyze how much cash they expect to receive and when they expect to receive it. In this type of project usually, the value of cash flow generated by an asset exceeds the cost of that asset. Calculating the size, timing, and risk of future cash flows is the core of capital budgeting. In the balance sheet, many items would be affected, long-term assets which include property, plant, and equipment

Three important factors are to be considered for making our decision whether to construct a new facility or not

Three important factors are to be considered for making our decision whether to construct a new facility or not

2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value.

The General Foods Accounting and Financial Manual identified four categories of capital investment project proposals: (1) safety and convenience; (2) quality; (3) increase profit; and (4) other.

In the Notice of Expenditures Reaching 85% of the Incremental Funding that was provided on November 11th, it was projected that the project was going to be $7.1K over budget. The actual cost variance as of the end of October was $17.5K. This was primarily driven by efforts to finalize the 35% Design. Majority of the cost increase was due to the additional time required by Jeff Sever and myself to manage the project. CH2M worked diligently to manage the budget by effectively using lower billable rate staff to perform portions of the 35% Design, minimizing the cost impacts. This can be seen in the average billable rate for the variance being $55/hour ($17.5K cost increase divided by 320 hours).

To be able to analyze the project, we need to calculate the project’s NPV, IRR, MIRR, Payback Period, and Profitability Index.

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

This cost system treated most, sales, marketing, and administrative costs as fixed costs or as a percentage of sales revenue. This simplistic approach was used to allocate overhead costs. Indirect costs were manufacturing costs that were allocated to products based on direct labor, or they were selling & administrative costs that were treated as period expenses and were unanalyzed. In this system if a customer sales price exceeded the full manufacturing cost plus the allocation of SM&A (sales, marketing, and administrative costs) then the customer appeared to be profitable when in fact the customer wasn’t profitable at all.

J. Maurice Clark (1923) outlined different types of overhead costs such as avoidable, sunk, incremental and relevant costs with which we are still familiar today. Clark illustrated “different costs for different purposes” and by using statistical data to estimate cost, it is more objective than that of judgemental arbitrary basis. However, he feared confounding factors that altered statistical relationship between cost and output but in present day we use multiple regressions to account for these factors. Clark separated cost accounting information from financial accounting for analysis on pricing strategy and operational efficiency. (Kaplan 1983)

despite the following dissertation being an Individual project I would have never reached my fully potential without my lectures and my supervisor is help and therefore I would like to extend my sincere & heartfelt obligation towards all the lectures who have helped me in make an effort towards getting best possible support for my dissertation and who faith in me and urged me to do better. Without their active guidance and constant encouragement, I wouldn’t have been able to complete my dissertation. I would like to thank the supervisor Mr Andrew Moran whose expertise, understanding and knowledge on this topic has guided me supported me in completing my dissertation and allow me to emailing him when I wasn’t able to attend my appointment, nevertheless I was able to communicate effective with him by e-mail and this was helpful for me.

If two investments have different lifespan, for example, one ending after two years and another ending after five years, the first project has an additional point of being able to reinvest the money which is unlocked at the end of the second year for another 3 years till the other investment end. This point is not considered in the IRR method. http://www.efinancemanagement.com/investment-decisions/advantages-and-disadvantages-of-internal-rate-of-return-irr\