FINANCIAL ANALYSIS

Financial analysis using NPV

Financial Analysis

1. Net present value and any relevant advice to management on salient issues to be considered

Net present value is calculated by subtracting present value of inflows from present value of outflows. Present value calculation requires a discount rate with which all the cash flows are discounted (Bierman, 2012, p. 3). In this case the discount rate is the weighted average cost of capital for the company which in this case is Katbuddys Confectionaries. Katbuddys Confectionaries uses both debt and equity mode of financing hence a weighted average cost of capital is most appropriate discount rate.

We will proceed with the calculation of NPV by first of all listing down the important cash inflows and outflows that will be used in the calculations.

Market research cost 400,000.00

number of visitors per day

20000

70% of visitors are expected to be children, hence

 

Expected children per day

14000

Expected adults per day

6000

Expected children per annum(assuming a 365 day year)

5110000

Expected adults per annum(assuming a 365 day year)

2190000

Admission price per ticket per child

15.00

Admission price per annum of children

76,650,000.00

Admission price per adult

25.00

Admission price per annum of adults

54,750,000.00

Revenue from an average visitor on account of food and drinks

10.00

Total revenue from an average visitor on account of food and drinks

200,000.00

40% of food and drink revenue is contribution, hence

 

Actual revenue from food and drinks after deduction of variable costs

80,000.00

Revenue from an average visitor on account of gifts and souvenirs

7.00

Total revenue from an average visitor on account of gifts and souvenirs

140,000.00

45% of gifts and souvenirs revenue is contribution, hence

 

Actual revenue from gifts and souvenirs after deduction of variable costs

63,000.00

Cash outflows

cash outflows year 0 year 1 year 2 year 3 year 4 year 5 Market research 400,000.00 construction costs 250,000,000.00 250,000,000.00 operation costs(including 5% raise) 17,000,000.00 22,850,000.00 28,992,500.00 35,442,125.00 42,214,231.25 insurance cost attributable to park project(including 5% raise) 2,000,000.00 2,100,000.00 2,205,000.00 2,315,250.00 2,431,012.50 labor cost(including 5% raise) 35,000,000.00 36,750,000.00 38,587,500.00 40,516,875.00 42,542,718.75 250,400,000.00 304,000,000.00 61,700,000.00 69,785,000.00 78,274,250.00 87,187,962.50

Cash inflows

Cash Inflows

 

 

 

 

 

 

 

year 0

year 1

year 2

year 3

year 4

year 5

Admission revenue from adults (including 5% raise)

 

54,750,000.00 57,487,500.00 60,361,875.00 63,379,968.75 66,548,967.19

admission revenue from children (including 5% raise)

 

76,650,000.00 80,482,500.00 84,506,625.00 88,731,956.25 93,168,554.06

revenue from food and drinks (including 5% raise)

 

80,000.00 84,000.00 88,200.00 92,610.00 97,240.50

revenue from gifts and souvenir (including 5% raise)

 

63,000.00 66,150.00 69,457.50 72,930.38 76,576.89

noncurrent asset after tax realizable value

 

 

 

 

 

150000000

reduction in advertising expenses (including 5% raise)

 

3,000,000.00 3,150,000.00 3,307,500.00 3,472,875.00 3,646,518.75

 

 

 

 

 

 

 

total inflows

 

134,543,000.00 141,270,150.00 148,333,657.50 155,750,340.38 313,537,857.39

Cash inflows and outflows for the project are calculated above keeping under consideration 5 percent raise for both receipts and costs. These cash flows have to be discounted at the project's weighted average cost of capital (WACC)

Calculation of WACC

The Katbuddys WACC is calculated by

WACC = (Cost of debt x (1 - tax rate) x proportion of debt in overall capital structure) + (Cost of equity x proportion of equity ...