ACCOUNTING & FINANCE

Accounting & Finance



Accounting & Finance

Introduction

The main objective of this analysis is to examine the feasibility of making investment in the purchasing of patent for a newly invented gardening tool that Entrepreneur D would manufacture and sell on a wholesale basis.. This analysis utilizes capital budgeting techniques to assess whether project should be pursued or not.

Task A

Net Cash Flow

Net Present Value

Internal Rate of Return

Accounting Rate of Return

Payback Period

Task B

Net Cash Flow for the Second Year

The correct net cash flow for the second year, if all cash expenses were as described in the scenario but there were no depreciation expense would be $ 462,000. Ignoring the depreciation expense for the second year would have a negative impact on the net cash flow for the second year. Cash flow does not influence by the depreciation since it is a non-cash expense (Brigham, 2008). Depreciation does not result in creating a cash outflow from the project (Donald, 2010). Therefore, net cash flow of the project involves those activities that create a change in the cash level (Helfert, 2001). Ignoring the depreciation expense from the second year cash flow would result in decreasing the cash flow figure as it would result in increasing the tax expenses for the year.

Impact of Depreciation on net cash flow for the second year

Depreciation is a non-cash expense that does not result in increasing the cash outflow from the given project (Lasher, 2010). Depreciation expense has an impact on the net income level based on the savings that company make in taxes due to increased depreciation expense (Osborne, 2010). While calculating the cash flow from net income using indirect method, depreciation expense is added back to the cash flow since no cash move out from the business for the above stated expense. However, if there were no depreciation expense, EBIT for the second year will increase that will result in creating higher cash outflow for the taxes. As a result, taxes will increase to $ 233,700 from $ 115,500. This will result in decreasing the net cash flow for the second year.

NPV Analysis and Recommendation

Net Present Value (NPV) is the most popular method when evaluating investment projects in the long term (Helfert, 2001). The net present value determines if the investment may increase or decrease the value of the company. If a NPV of an investment is greater than 0, then the investment would add value to the firm, therefore we will accept this investment. If the NPV of an investment is less than 0, this means the investment will take away value from the firm; therefore it is best to reject this project (Helfert, 2002). NPV analysis shows that Entrepreneur D should get the patent for a newly invented gardening for manufacturing and selling on a wholesale basis. NPV analysis shows that project has positive NPV value over eight year's duration. The NPV level of the project is $ 46,035 which shows that project is a highly attractive ...