The report highlights the fact related to the Booli Electronics. The business is going to diversify its activities to have a large market share by using some innovation in its strategy. The report discusses the fact and figures whether the business should expand or not. The report focuses on the various techniques of capital budgeting to know whether the proposal is accepted or not. The business decisions based on the capital budgeting techniques are used in the report. The project acceptance and rejection are based on the cost and profitability of the project (Sayadi, Tavassoli, Monjezi and Rezaei, 2014). The Booli electronics have to decide whether to go for the new introduction of product or not. The Booli Company profitability, payback period, internal rate of return is discussed in the report.
1.
Non-discounted payback period
The non-discounted payback period can be defined as the period in which the time value of money has been ignored. This technique assumes that there will be no revenues after the project is completed (Peng and Yang, 2013). In the case of Booli electronic, the payback period comes out to be 1.7 years (Refer Appendix 1). This indicates that the company can recover its capital in years and 7 months only.
2.
Profitability Index
Profitability index can be defined as the index which shows the profit earning capacity of the business. If the profitability index is more than 1 then the project will be accepted and if it comes out to be less than 1 then the proposal is rejected (Brunzell, Liljeblom and Vaihekoski, 2013).
Profitability Index = Present value of Future cash flow
Initial Investment
OR
= (NPV+ initial investment)/Initial investment
Net present value is directly related to the maximizing the wealth and earnings of the business (Faccio, Marchica and Mura, 2016). The profitability index comes out to be 2.78(Refer Appendix 2) which is greater than 1. The project should be accepted as it is greater than 1.
3.
IRR of the project
Internal Rate of return is the rate at which the business calculates its returns. This rate will not be influenced by the external factors. The acceptance criterion for IRR is that if the internal rate of return is come out to be more than the cost of capital then the proposal will be accepted otherwise rejected (Rossi, 2014). In Booli Company, the IRR comes out to be —- which is more than the cost of capital. The Internal rate of return comes out to be 54.21% (Refer Appendix 3) which is much more than the cost of capital of the company. According to the criterion, the project should be accepted by the Booli Electronics.
4.
NPV of the project
The net present value is the value of a company which comes out after taking its present value in consideration. In other words, we can say that NPV is the difference between the total present value of cash inflows at discounted factors and initial investment. This technique is considered to be the most important in deciding whether the project is accepted or not (Faccio, Marchica and Mura, 2016). The Net present value can be calculated from the following formula:
Where,
Ct = net cash inflow during the period t
Co = total initial investment costs
r = discount rate, and
t = number of time periods
If the net present value it comes out to be positive or greater than 1, the project will be accepted by the company and vice versa. In this case, the NPV comes out to be $837, 57,614 (Refer Appendix 2) so the project will be accepted as the NPV is more than 1 (Brigham, Ehrhardt, Nason and Gessaroli, 2016).
5.
The Net present value is sensitive to the changes in the prices. In traditional terms, the cost and benefit analysis uses the net present value calculations in determining the revenues and expenditures over a period of time. The business of Electronics comprises of lots of risk and uncertainties. These risk and uncertainties lead to the change in the price of the product (Bierman and Smidt, 2014). The market is dynamic in nature and gives the opportunity to the businessman to have the advantage and opportunity from the market. So the changes in the price of the project affect the cash flows and earnings of the project. Change in price leads to knowing the present value of the company at which the company is offering the product to its customers.
6.
The change in the net present value also changes the quantity demanded in the market. From the data, we can analyse that in initial years the quantity sold by the company is high when compared to the fifth year. If the cash flows of the company are high that means the company is selling more units and earning high revenue also. Change in the cash flow leads to the change in the NPV of the project as there is the direct relationship between the cash inflows and NPV of the project. If the cash inflows are increasing then the NPV will also increase and vice versa (Graham, Harvey and Puri, 2015).
7.
Yes, the Booli electronics Company should go for the SSHA product. This product will give the benefit to the company in revenue terms. From the data given, it can be analysed that the sales are increasing in the initial years but after sometimes the sale of the company goes on decreasing. This is the reason that the company should go for the implementation of the new product in the market so to have a share in the market (Baker, Jabbouri, and Dyaz, 2017). This new product has new and exciting features which will influence the customers and company can able to gain more revenues. The product SSHA includes the features like Wi-Fi tethering and access to a large number of music streaming services including Amazon, Spotify etc. The proposal should be accepted as the project found to be good and high.
8.
If the overall sales of the Booli Electronics have been decreased because of the introduction of SSHA in the product line then the project should be offered in the market in such a way that the other product sale will not be affected. The company should try for the method which will enhance the sale of SSHA while maintaining the sale of an existing product. The analysis would affect a lot as there will be fewer cash flows earned by the company which will affect the profitability and cash flows of the business. This decrease in the sale of the company also affects the cash inflows of the company which ultimately affect the price and quantity of the product (Walden and Kitts, 2014).
Conclusion
From the above discussion, we can conclude that the Booli electronics should go for Opting the expansion in the product range by introducing the SSHA. According to the analysis, it is visible that the company is earning is well at present and can increase it’s earning from the new product expansion the cash flows calculated are come out to be positive and showing the increasing trends. The profitability index is come out to be more than which indicates that the project should be accepted by the company. The company can also able to recover its cost in fewer years. The internal rate of return of the company is also coming out to be more than the cost of capital. The price and quantity are also favouring the company strategy in the market. From all the calculations and discussion, it can be stated that the proposal of the new project should be accepted.
References
Baker, H.K., Jabbouri, I. and Dyaz, C. (2017). Corporate finance practices in Morocco. Managerial Finance, 43(8), pp.865-880.
Bierman Jr, H. and Smidt, S. (2014). Advanced capital budgeting: Refinements in the economic analysis of investment projects. Oxon: Routledge.
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J. (2016) Financial Managment: Theory And Practice, Canadian Edition. Ontario: Nelson Education.
Brunzell, T., Liljeblom, E. and Vaihekoski, M. (2013) Determinants of capital budgeting methods and hurdle rates in Nordic firms. Accounting and Finance, 53(1), pp.85-110.
Faccio, M., Marchica, M.T. and Mura, R. (2016) CEO gender, corporate risk-taking, and the efficiency of capital allocation. Journal of Corporate Finance, 39, pp.193-209.
Graham, J.R., Harvey, C.R. and Puri, M. (2015) Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115(3), pp.449-470.
Peng, J., Lu, L. and Yang, H. (2013) Review on life cycle assessment of energy payback and greenhouse gas emission of solar photovoltaic systems. Renewable and Sustainable Energy Reviews, 19, pp.255-274.
Rossi, M. (2014) Capital budgeting in Europe: confronting theory with practice. International Journal of Managerial and Financial Accounting, 6(4), pp.341-356.
Sayadi, A.R., Tavassoli, S.M.M., Monjezi, M. and Rezaei, M. (2014) Application of neural networks to predict net present value in mining projects. Arabian Journal of Geosciences, 7(3), pp.1067-1072.
Walden, J.B. and Kitts, N. (2014) Measuring fishery profitability: An index number approach. Marine Policy, 43, pp.321-326.
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