PROJECT VALUATION

Project Valuation



Project Valuation

Question 1

Weighted Average Cost Of Capital

=

E

x Re

+

D

x

Rd

x

(1-Tc)

V

V

Weighted average cost of capital

=

0.75

x 0.1

+

0.25

x

0.06

x

1*-0.28

Weighted average cost of capital

=

0.075

+

0.25

x

0.06

x

0.72

Weighted average cost of capital

=

0.008

+

0.01

Weighted average cost of capital

=

2%

Discounted Factor

6.00%

Year

0

1

2

3

4

Net Cash flow

(90,000,000)

8000000

8000000

8000000

8000000

Cumulative Cash flow

(90,000,000)

(82,000,000)

(74,000,000)

(66,000,000)

(58,000,000)

Discounted Cash flow

(90,000,000)

7,547,170 7,119,972 6,716,954 6,336,749

NPV

(62,154,996)

payback period

5

Accounting Rate of Return (ARR)

=

Net Return

x 100

Capital cost

=

3,200,000

x 100

90,000,000

=

3.56

%

IRR

-31.51%

From the above calculation, it can be recommended to PPP that the Finance Director should not proceed with the project as the net present value of the project is in negative. Moreover, the weighted average cost of capital is also 2%. The net present value (NPV) is the most popular method when evaluating investment projects in the long term. The net present value to determine whether an investment complies with the basic objective financial: maximize investment. The net present value determines if the investment may increase or decrease the value of small and medium enterprises. This change in the estimated value may be positive, negative, or remain the same. If it is positive means that the value of the firm will have an increase equal to the amount of net present value. If it is negative than that the firm will reduce its wealth in the value yielding the NPV; if the result is zero net present value of the firm does not change the amount of its value. It is important to note that the value of net present value depends on the initial investment prior investments during the operation, the net cash flows, the discount rate and the number of periods throughout the project (Groppelli and Ehsan, 2006, 23-39).

In addition to this, a positive value of NPV is that the capital investment is efficient. The concept of net present value is widely used in investment analysis for the evaluation of investments. The above formula is valid only for the simple case of the structure of cash flows, where all investments are in the beginning of the project. In more complex cases for analysis may be necessary to complicate the formula to take into account the distribution of investment over time. Most often, this investment leads to the beginning of the project is similar incomes. The net present value measure based on information accounting if the investment is expected to achieve the objectives of capital providers. A positive NPV indicates that the investment can be undertaken. However the NPV is a provisional assessment tool based on information remains difficult to predict (Groppelli and Ehsan, 2006, 32-46).

Weighted average cost of capital

=

E

x Re

+

D

x

Rd

x

(1-Tc)

V

V

Weighted average cost of capital

=

0.5

x 0.1

+

0.5

x

0.08

x

1*-0.28

Weighted average cost of capital

=

0.5

+

0.5

x

0.08

x

0.72

Weighted average cost of capital

=

0.05

+

0.03

Weighted average cost of capital

=

8%



Discounted Factor

8.00%

Year

0

1

2

3

4

Net Cash flow

(90,000,000)

8000000

8000000

8000000

8000000

Cumulative Cash flow

(90,000,000)

(82,000,000)

(74,000,000)

(66,000,000)

(58,000,000)

Discounted Cash flow

(90,000,000)

7,407,407 6,858,711 6,350,658 5,880,239

NPV

(62,868,095)

payback period

5

Accounting Rate of Return (ARR)

=

Net Return

x 100

Capital cost

=

3,200,000

x 100

90,000,000

=

3.56

%

Sensitivity and Risk Analysis

PPP may face risk due to various ...