Applied Corporate Finance

Applied Corporate Finance

Ans1-

Existing Model

Year 1

Year 2

Year 3

Year 4

Total Amount

DF (14%)

0.877192982

0.769467528

0.674971516

0.592080277

 

DCF

14.03508772

12.31148046

10.79954426

9.473284438

46.59

New Model

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

Total Amount

DF (14%)

0.877192982

0.769467528

0.674971516

0.592080277

0.519368664

0.455586548

0.399637323

0.350559055

0.307507943

0.26974381

 

DCF

23.68421053

20.77562327

18.22423094

15.98616749

14.02295394

12.30083679

10.79020771

9.465094481

8.302714457

7.283082857

137

NPV for the Existing Model

Discounted Cash Flows-Initial Investment = -13.41K

NPV for the New Plant Model

Discounted Cash Flows-Initial Investment = 17K

The formula that was used for this question was of DCF which read as: 1/1+r^1. Then after the calculation of DCF, the formula for NPV read as= Discounted Cash Flows- Initial Investment. It was seen from the calculation that if the existing project will be continued, then the incoming net cash flows are not very high. In fact, this project will incur a loss in terms of the net present value for the business. However, in the case of the new project, the NPV is higher which indicates that the business is going to be better off in this scenario. It is very clear that Titanium Pty Ltd will need to buy the new project in order to have the benefit of long-term gain. Therefore, it is quite clear that Titanium Pty Ltd will have to proceed with the new project.

Ans2- Cost Management can then only be effective if it prospectively (i.e. looking into the future) and is non-reactive. What use is it if, for example has already occurred a crisis situation and for making decisions or even acts no time is left. A reactive behavior can thus not effectively protect against financial loss. Furthermore, it should be noted for the cost structure of complex projects that the cost of a change - either in the specification or the elimination of an error - the more an investment grows, the closer one gets to the end of the project. Therefore it is extremely important at the beginning of a project the resources (costs). In the planning stages (specification, collusion) to donate to the later stages in order to avoid extremely expensive project changes and adaptations matters to a very large extent. The Earned Value Analysis (EVA) is an important tool to control costs, while taking into account the environment, the project, the planned and actual schedule and the associated costs. Based on the approved cost planning which may also contain possible or permitted project changes) can be determined how well or poorly the project at the current time meets the cost and schedule targets. In the EVA to be periodically updated information entered (Boyd, 1994).

NPV is an indicator that can make the decision as to the profitability or not of an investment project. Like any project, investors begin with an initial investment (a large sum of money at the beginning), which allows them to create and run their project, waiting for the return of earnings thereafter. Well the operation of the NPV is very simple; it consists in comparing the earnings of a project to its initial investment. The Net Present Value (NPV) is the best known method when evaluating investment projects in the long term. The net present value to determine ...