FINANCIAL ANALYSIS

Financial Analysis

International Food Genetics - Case Study

Introduction

The importance of systematic appraisal is for achieving better spending decisions for capital as well as expenditure. Companies have been using different investment techniques so that they can avoid future losses which have direct relationship with the company's profitability. The focus of this paper would be on advising Board of Directors of IFG concerning the viability of the proposed project using the Net Present Value-NPV, Internal Rate Return-IRR and payback methods-PBP. The other part discussion would be covering the statement analysis of “The IRR rule is redundant as an investment criterion because the net present value (NPV) rule always dominates it”.

Discussion

Part a: Financial Viability of the Project

Overview of the Project

International Food Genetics is a company that has been considering an investment in a project that will supply seeds and permit International Food Genetics to market and distribute them under a licence. This project would be starting in 2008 and there would not be taxation due to the special status as a growth industry.

Financial Viability of the Project

There are certain measures that assess the financial Viability of the project; among them the most important one is the forecasted profit and loss accounts prepared by junior and inexperienced accounted. The capital budgeting techniques will be utilizing i.e. Net Present Value-NPV, Internal Rate of Return-IRR and payback methods-PBP due to their attractive features and distinct advantages (Rudolf, 2008, pp. 1-5).

Net present Value-NPV

Net present Value indicates the present value of future cash flow. According to financial analyst, this method has been used to see the current worth of the money that would be generated by the project in future time period (university.akelius.de).

The following is the project's Net present value.

International Food Genetics

Investment project

Year

 

2008

2009

2010

2011

2012

 

 

£'000

£'000

£'000

£'000

£'000

Initial investment

-£1,000

 

 

 

 

 

Sales

 

5000

6000

6000

6000

6000

Costs

 

 

 

 

 

 

Vehicles

500

Market research

 

100

 

 

 

 

Raw material (seeds)

 

2000

2400

2400

2400

2400

Licence

 

1000

1000

1000

1000

1000

Vehicle fleet depreciation

 

100

100

100

100

100

Direct wages

 

500

500

500

500

500

Rent

 

200

200

200

200

200

Overheads

 

500

500

500

500

500

Variable transport costs

 

500

500

500

500

500

Total cost

 

5400

5200

5200

5200

5200

 

 

 

 

 

 

 

Profit

-£1,000

-400

800

800

800

800

 

 

 

 

 

 

 

Discount rate

1

0.93458

0.87344

0.8163

0.7629

0.71299

Discounted cash flows

-£1,000

-£374

£699

£653

£610

£570

NPV

£1,159

 

 

 

 

 

Net present value of the project is £1,159 which state that project should be accepted. The reason of this acceptance is due to the decision thumb rule. According to these rule, a project having positive Net Present Value should be accepted since this would be add value to the company i.e. investment is profitable in future. Project having negative Net present value should not be taken into consideration since this would subtract value from the company i.e. investment is not profitable in future. Considering this rule, the project should be taken into consideration as this would be profitable in future and would further add value to the company along with the improvement in company's financial structure (wps.aw.com).

Internal Rate of Return

Internal rate of return is a discount rate which makes project's Net Present Value equal to 0. According to financial analyst, this rate has been used as a growth rate for the project (shodhganga).

International Food Genetics

Investment project

Year

 

2008

2009

2010

2011

2012

 

 

£'000

£'000

£'000

£'000

£'000

Initial investment

-£1,000

 

 

 

 

 

Sales

 

5000

6000

6000

6000

6000

Costs

 

 

 

 

 

 

Vehicles

 

500

 

 

 

 

Market research

 

100

 

 

 

 

Raw material (seeds)

 

2000

2400

2400

2400

2400

Licence

 

1000

1000

1000

1000

1000

Vehicle fleet depreciation

 

100

100

100

100

100

Direct wages

 

500

500

500

500

500

Rent

 

200

200

200

200

200

Overheads

 

500

500

500

500

500

Variable transport costs

 

500

500

500

500

500

Total cost

 

5400

5200

5200

5200

5200

 

 

 

 

 

 

 

Profit

-£1,000

-400

800

800

800

800

 

 

 

 

 

 

 

Discount rate

1

0.93458

0.87344

0.8163

0.7629

0.71299

Discounted cash flows

-£1,000

-£374

£699

£653

£610

£570

IRR

31%

 

 

 

 

 

Payback Methods

Payback period refers to the duration at which cost of investment will be recovered. This shows that how much time ...