Project Economics and Finance Samples for Students †MyAssignmenthelp.

Question: Discuss about the Project Economics and Finance. Answer: Introduction The project undertakes the new setup of a business organization in the country Australia. The projects have made an analysis and discussion about the computation of the sensitivity and break-even analysis. It has made an analysis of the financial structure of the project. The report will proved useful for the established company because the same will provide information of significant character. Financial representation of the project undertaken The value of the market will be identified by the model of option pricing. It is helpful in the computation of the prices in future, the strike prices of an underlying nature along with the present prices (Frank Pamela, 2016). Sensitivity analysis The analysis measures the productivity or the level of profitability of the company attained even after the variety of changes occurring within the company. As per the analysis, the investment returns are impacted by the probable fluctuations in costs, rate of interest and a variety of variables. The analysis is helpful for the decision making process of investments. It depicts the result produced with the changes the companys budget and forecasted data (Ding VanderWeele, 2016). The sensitivity analysis is analyzed and evaluated as below: The analysis assists in the evaluation of the impact that is created by a number of fundamental parameters. The impact is created on the profits and returns of the projects. The parameters that have been considered for the analysis done above are the rate of inflation; rate of growth, WACC i.e. the Weighted Average Cost of Capital. Inflation The rate of inflation is one of the parameter that is creates the influence on the margins of profit and the returns. The rate is the factor related to the macro economy and it is seen from the above analysis that the margin of profit will have no effect. The average margin of gross profit will be stable at 22.22% and did not change irrespective of the change in the rate of inflation. The change in the rate of inflation from any rate i.e. 2%, 2.5% and even 3.5% did not have any effect on the gross profit margin of the company. With the change in rates of the inflation, in the case of the average margin of net profits, there were no considerable impacts on the margin. The margins had changed with smaller points i.e. from 3.52% to 3.63% 3.69% with changes in rate of 2%, 2.5% and even 3.5% respectively. With the change in rates of the inflation, in the case of the return on equity, there were no considerable impacts on the returns. The returns on equity had changed with smaller points i.e. from 19.79% to 20.84% 21.49% with changes in rate of 2%, 2.5% and even 3.5% respectively. There has been an increase in the net present values and also an increment in the rates of the IRR, ARR had taken place along with the profitability index of the company. Average Growth Rate The factor of the growth rate in average is one of the three parameters that indicate the profitability position of the company. The average margin of gross profit will be stable at 22.22% and did not change irrespective of the change in the rate of growth. The change in the rate of growth from any rate i.e. 3%, 5% and even 7% did not have any effect on the gross profit margin of the company. With the change in rates of the growth, in the case of the average margin of net profits, there was an increase in the margin. The margins had changed i.e. from 3.47%, 3.63%, and 3.78% with changes in rate of 3%, 5% and even 7% respectively (Ferretti et al., 2016). The net return on equity has increased 19.36%, 20.84%, and 22.32% respectively due to increase in rate of growth. There has been an increase in the net present values and also an increment in the rates of the IRR, ARR had taken place along with the profitability index of the company. The change in rate of the IRR and ARR were comparatively lower than the profitability index of the company. With the change in rates of the WACC, there have been no changes in the case of the average margin of net profits, gross profits or the ARR. There was a significant decline in the NPV value and also in the values of the profitability index of the project of the company with changes in WACC. The factor WACC can be managed and designed as per the necessity of the project as it is an internal factor and the other factors i.e. inflation and the rate of growth are noteworthy in the amount of effect created (Palley, 2016). Break-even analysis The analysis of the projects is used in the determination of the stage or point at which the generated profits and losses comes at a same level. The project feasibility is ascertained by the break even analysis and the analysis also demonstrates the margin of safety of the business. The analysis takes into account the variable, fixed and semi variable costs for the determination of the analysis of break even for the company. It has been calculated for a period of five years and it can be seen that there is a fixed cost that has an association with the increasing sale price per unit. The reason is the increment in the margin of safety and the increment in the sales is not necessary for the covering of the fixed cost in totality. The decline of the breakeven provides indication about the fact that there can be coverage of the fixed costs with the decline in the break even sales (Gatti et al., 2013). Projects Capital budgeting The viability of the project for the long term or future is identified and evaluated by the tools of the capital budgeting process. The method contains the calculation and assessment of the feasibility of the project implementation (Malenko, 2016). The procedures used include the determination of the net present value, profitability index, accounting rate of return, and internal rate of return. Year Particulars 0 1 2 3 4 5 Initial Investment: Purchase of Non-Current Assets -2575000 Preliminary Expenses -835000 Working Capital -2075000 Total Initial Investment -5485000 0 0 0 0 0 Net Operating Profit before Tax 0 865125 1042855 1232555 1435316 1652315 Less: Income Tax 0 200299.5 253618.4 310528.4 371356.8 436456.5 Net Operating Profit after Tax 0 1065425 1296473 1543083 1806673 2088771 Add: Depreciation Amortization 0 790000 766025 742932 720687.1 699257.9 Net Operating Cash Flow 0 1855425 2062498 2286015 2527360 2788029 Terminal Value: Sale of Non-Current Assets 560000 Recovery of Preliminary Expenses 42500 Recovery of Working Capital 2075000 Total Terminal Value 0 0 0 0 0 2677500 Net Annual Cash Flow -5485000 1855425 2062498 2286015 2527360 5465529 Discount Rate (WACC) 11.22% 11.22% 11.22% 11.22% 11.22% 11.22% Discounted Cash Flow -5485000 1668247 1667354 1661615 1651717 3211573 Net Present Value 4375506 IRR 20.84% Average Accounting Profit 733721 ARR 13.38% Profitability Index 79.77% The feasibility of the project is possible if the NPV of the project considered is positive in amount and in the given case, the NPV value is positive. The present value of the total outflows of cash is less than the present value of the total inflows. The value of NPV is positive that represents the higher rate of return. The NPV of project stands at $4,375,506. The internal rate of return is the rate at which the IRR of the company becomes zero. The IRR was 20.84% and as the value is high, the project is preferable. The project is considered profitable and feasible but the WACC is less that must be controlled as the IRR must be lower than the WACC. The Average accounting profit was positive and the amount is $733,721. The ARR stood at 13.38% (Hasan, 2013). The profitability index is the final technique used for estimating the viability of project. It helps in the quantification of the investment amount that gets created on the basis of unit invested. The index must be one to get accepted and if the index declines to lower than one, the project must not be accepted. Both the present and future values are taken into consideration for the calculation and the risks that are involved in the future cash flows are detected to some extent. The index of the project was 79.77% and the same is less than one. Thus, the project is not able to gain full profits from the investments in the starting year of the project (Iooss Lematre, 2015). Conclusion The procedures that have been used include the sensitivity analysis, break-even analysis, determination of the net present value, profitability index, accounting rate of return, and internal rate of return.The sensitivity analysis was done with respect to the net profit margin, gross profit margin and return on equity and each of them turned to be positive. On the other hand, there was a negative effect on profitability index and internal rate of return. The factor WACC can be managed and designed as per the necessity of the project as it is an internal factor and the other factors i.e. inflation and the rate of growth are noteworthy in the amount of effect created. The Break even analysis depicts that there is a fixed cost that has an association with the increasing sale price per unit. The reason is the increment in the margin of safety and the increment in the sales is not necessary for the covering of the fixed cost in totality. The decline of the breakeven provides indication ab out the fact that there can be coverage of the fixed costs with the decline in the break even sales. Therefore, by having a look at all the features the project is considered feasible and must be accepted. References Ding, P., VanderWeele, T. J. (2016). Sensitivity analysis without assumptions.Epidemiology (Cambridge, Mass.),27(3), 368. Ferretti, F., Saltelli, A., Tarantola, S. (2016). Trends in sensitivity analysis practice in the last decade.Science of the Total Environment,568, 666-670. Frank, J. F., Pamela, P. P. (2016). Financial Management and Analysis. Gatti, S., Kleimeier, S., Megginson, W., Steffanoni, A. (2013). Arranger certification in project finance.Financial Management,42(1), 1-40. Hasan, M. (2013). Capital budgeting techniques used by small manufacturing companies. Iooss, B., Lematre, P. (2015). A review on global sensitivity analysis methods. InUncertainty Management in Simulation-Optimization of Complex Systems(pp. 101-122). Springer US. Kashyap, A. (2014). Capital Allocating Decisions: Time Value of Money.Asian Journal of Management,5(1), 106-110. Magni, C. A. (2016). An average-based accounting approach to capital asset investments: The case of project finance.European Accounting Review,25(2), 275-286. Malenko, A. (2016). Optimal dynamic capital budgeting. Palley, T. (2016).Financialization: the economics of finance capital domination. Springer. 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