Discuss about the Investment Decisions and Sensitivity Analysis.
Selection or rejection of new project is based on capital budgeting tools. Further, the steps engaged in this process are; estimation of cash flows wherein the maturity value, interest or dividends in a situation of stocks and bonds are considered, whereas the operating cash flow in a situation of cash flows (Kerzner and Kerzner, 2017). Another step is assessing the risk factor of cash flow; the next step is the determination of the suitable discount rate on the basis of cash flows and standard level of rate of interest. Another step is the evaluation of cash flows.
Net present value is the best suitable tool of capital-budgeting; it has stability with the aim of maximizing the wealth of shareholder. This methodology makes a comparison of the present value of potential benefits as well as cash flows from the project to the present value of the potential costs. In a situation where the benefits are higher, then it will result in the selection of the project (Kerzner, 2018). Further, implementation of IRR can be done; this makes a comparison of the capital cost of the firm to the RRR creating the net cash flows from the project equivalent to the cost of the project.
Moreover, a project is agreed when the IRR is higher as compared to the capital cost of the firm. Other tools are payback period and profitability index, but these are less effective in comparison to other two methods (Harrison and Lock, 2017). Better rankings are provided by NPV or IRR on the basis of the assumption of optimal reinvestment rate, whichever is higher. Usually, the assumption of NPV is comparatively better. Firms have limited capital amount in order to make a commitment towards the project. In case the firm has raised capital externally to finance certain positive variables of NPV projects, then the firm will experience increased capital cost. One other impact of the large budgeting of capital is that firm might go for ration capital that is not financing all the projects. Firms have limited capital amount in order to make a commitment towards the project. In case the firm has raised capital externally to finance certain positive variables of NPV projects, then the firm will experience increased capital cost. One other impact of the large budgeting of capital is that firm might go for ration capital that is not financing all the projects.
The cost management plays a great role at every stage of the project. It is inclusive of the procedure needed to ensure that the completion of the project is within the boundary budget. Furthermore, it retains activities like cost estimation, controlling and resource planning. The activities are repeated at every stage until the end of the project. Cost management is engaged in determining policies, processes, and documentation that are needed to conduct planning, controlling and implementing the project cost(Heagney, 2016). Cost management plan is the major output of this entire process. It considers the planning process and budget controlling; along with this, it contains further activities so as to ensure that the project is cost-effective. The overall life cycle of the project is covered under cost management from starting phase to ending phase of the project.
Cost management has high importance in the project as it evaluates controls and optimizes costs form a mere dashboard (Lock, 2017). It helps in establishing an optimal baseline for the project’s cost expectations and actions to make sure that is the project is revolving under the budget. Further; it allows the project manager to conduct cost management activities like monitoring costs on a real-time basis, so they are aligned with the budget.
The most significant approach to the project management is effective communication, it is considered as very important in the life cycle of the project while setting and implementing the project. This will create transparency thereby making the process seamless (Chang, 2016).
One of the most significant approaches is cost estimation in project management, which exercises the price planning, forecasting of project completion with the appropriate scope.
In project management, when perfect cost estimation is created, then the selected software will enable to finalize with the approvance of the budget of the project.
Planning is another integral tool in project management, by considering this aspect project manager must do planning before starting the project and keep on continuing, developing and revising it unless and until the project come to an end (Hill, Jones and Schilling, 2014).
In order to fund a project, long-term financial sources are equity finance, debt finance and venture capital and the same are represented and depicted as below:
It is a methodology of raising new capital by putting the shares of the company into sale to public, financial and institutional investors. The public purchasing the company shares are known as company shareholders, it is because they have obtained the ownership of the company. Equity finance comes with no payments of interest, no liability and monthly payments (Gitman, Juchau and Flanagan, 2015). However, it forces the company to give up its ownership, to the investors, and there is also the loss of control, along with the distribution of profit.
This financing takes place when a firm raises fund for working capital or capital expenses by putting debt instruments into the sale to public or institutional investors. In exchange for borrowing the money, public or institutions are converted into creditors and obtain an assurance the repayment of interest on the debt. This financial source is inclusive of secured and unsecured loans. Security is engaged with collateral form as a promise on the repayment of the loan. The advantage of equity finance is complete ownership of the company (Ehrhardt and Brigham, 2016). On the other hand, the main drawback of this financing is interest; the borrower has to pay interest on the debt as per the agreement. Also, there are severe lending obligations, it is hard to obtain equity, particularly for the startups.
Venture capital is a type of long-term financing, provided by investors to small or start-up companies who are in pursuit of successful long-term growth. It arises from investment banks, financial institutions, and investors. It benefits the company with business expertise, regardless of financial backing; acquiring venture capital can assist the startup in holding meaningful consultation and guidelines with the proper flow of additional resources (Barton and Wiseman, 2014). However, with the acquiring of venture capital, business losses control on its operations, and also there is a transfer of ownership status.
The project scope is the initial aspect that a business must consider while aiming at the targets and objectives of the project. Once, a business considers the project scope, and then a proper plan can be developed (Vom Brocke, Petry and Gonser, 2016). On the other hand, a business must be fully aware of the changes related to the scope of the project.
It is essential to initially identify the main risks associated with the project, in order to solve them before they arise. Business must consider that what aspects can make the project wrong, and by considering the business must look for best possible ways to overcome the same.
Business must consider the proper utilization of resources from technology to HRM, and they are required to assign tasks by considering availability and strengths. Further, a business must conduct optimum utilization of available resources so as to prevent any issue.
These aspects are important bro maximize the resources, eliminate risks associated with the project while meeting the overall goals and targets of the project. These can have a direct or indirect impact on the project conducted effectively non-effectively (Nicholas and Steyn, 2017). When the project is finished, it is positioned at a realistic chance of getting things on a real-time basis, while taking the suitable measures and taking appropriate tools into account
Projects are wound up when they are completely finished, and the aims and targets are met. They are resource or infrastructure considerations, due to the
Investment project involves high amount of funding thus company should make use of proper tools for assessment in order to make viable decision. Usually, the assumption of NPV is comparatively better than other tools. Further; cost management is considered as very important to each individual associated with the project. The project manager is required to estimate the cost to make sure that the returns are higher to create a worthwhile and meaningful project. Another crucial aspect in decision making is selection of source of finance which is required to be taken by considering all pros and cons to ensure minimum finance cost. Project manager is also recommended to consider environmental issues in decision making as these are associated with the project, as there are scrap and waste materials which are required to be disposed of in a sustainable and green way, creating no impact to the environment.
No, Myer Company has equity capital on the issue as the value of common equity stock in the year 2016 was $779963 which remains the same in the next year that is in 2017 as $779963 (Myer Holdings Ltd, 2018).
An entity raises equity capital to meet the higher funding requirement of a business. Equity capital raises by an entity in two ways such as selling or common or ordinary shares or preferred shares which helps in attracting the interest of the entire investors in the external market (Caselli and Negri, 2018). It is generally used by an enterprise to meet the giant funding requirements.
The biggest reason behind the decrease in the profit of Myer in the year 2018 is due to conflict with its largest shareholder who significantly influences the performance of the company is Billionaire Solomon Lew’s Premier investments in Myer company (Reason for the drop in the sale of Myer, 2018).
|
Year |
Revenue |
Increasing % |
Incremental Revenue |
Sale of store |
Tax rate |
Costs |
Working capital |
Depreciation |
Profit after tax and depreciation |
Depreciation |
Cash flow |
|
1 |
5.5 |
2% |
5.61 |
0 |
0.6 |
2.2 |
0.5 |
3.91 |
0.5 |
4.41 |
|
|
2 |
5.61 |
2% |
5.72 |
0.00 |
0.60 |
2.24 |
0.5 |
3.98 |
0.5 |
4.48 |
|
|
3 |
5.7222 |
2% |
5.84 |
0.00 |
0.60 |
2.29 |
0.5 |
4.05 |
0.5 |
4.55 |
|
|
4 |
5.836644 |
2% |
5.95 |
0.00 |
0.60 |
2.33 |
0.5 |
4.12 |
0.5 |
4.62 |
|
|
5 |
5.953377 |
2% |
6.07 |
9.00 |
0.60 |
2.38 |
2 |
0.5 |
11.59 |
0.5 |
12.09 |
|
Year |
Cash flow |
Present value |
|
|
Initial investment |
10 |
||
|
1 |
4.41 |
0.952381 |
4.2 |
|
2 |
4.4782 |
0.907029 |
4.06 |
|
3 |
4.547764 |
0.863838 |
3.93 |
|
4 |
4.618719 |
0.822702 |
3.80 |
|
5 |
12.09109 |
0.783526 |
9.47 |
|
Total |
25.46 |
||
|
NPV |
15.46 |
Net present value method is one of the approaches to capital budgeting which helps in assessing the future profitability of a particular project. Higher or positive NPV signifies the efficiency or deficiency of a project to select or reject the same (Marchioni and Magni, 2018). NPV of the current project is 15.46 is higher as this project has covered the initial cost of a project that is $10 million.
|
Year |
Cash flow |
Present value |
|
|
Initial investment |
9.5 |
||
|
1 |
4.1895 |
0.952381 |
3.99 |
|
2 |
4.256 |
0.907029 |
3.86 |
|
3 |
4.3225 |
0.863838 |
3.73 |
|
4 |
4.389 |
0.822702 |
3.61 |
|
5 |
11.4855 |
0.783526 |
9.00 |
|
Total |
24.19 |
||
|
NPV |
14.69 |
Due to changes in the Canadian dollar from $1 Canadian dollar to $0.95 the net present value of the above project gets decreases to $14.69 from $15.46 that means the decrease of $0.77. When comparing the two projects where the cost of the project remains the same but its outcome gets changes due to the changes takes places in the dollar value of Canada. The similar project with lesser net present value is rejected as compared to the earlier project with a higher NPV.
It is suggested to an entity to select a project with a higher net present value of a project worth of $15.46 by rejecting a project worth of an NPV of $14.69.
The changes take places in the project’s NPV value due to changes takes places in the currency of Australian and the Canadian Dollar. First project’s NPV is higher due to the constant currencies value of both the Australian and Canadian Dollar.
Similarly, in the second project decrease in value from $1 dollar to $0.95 dollar will, in turn, decreases the profitability of Myer.
References
Barton, D. and Wiseman, M., 2014. Focusing capital on the long term. Harvard Business Review. 92(1/2). pp.44-51.
Caselli, S. and Negri, G., 2018. Private equity and venture capital in Europe: markets, techniques, and deals. Academic Press.
Chang, J. F., 2016. Business process management systems: strategy and implementation. CRC Press.
Ehrhardt, M. C. and Brigham, E. F., 2016. Corporate finance: A focused approach. Cengage learning.
Ehrhardt, M. C. and Brigham, E. F., 2016. Corporate finance: A focused approach. Cengage learning.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach. Routledge.
Heagney, J., 2016. Fundamentals of project management. AMACOM Div American Mgmt Assn.
Kerzner, H. and Kerzner, H.R., 2017. Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.
Kerzner, H., 2018. Project management best practices: Achieving global excellence. John Wiley & Sons.
Lock, D., 2017. The essentials of project management. Routledge.
Marchioni, A. and Magni, C. A., 2018. Investment Decisions and Sensitivity Analysis: NPV-Consistency of Rates of Return.
Martinelli, R. J. and Milosevic, D. Z., 2016. Project management toolbox: tools and techniques for the practicing project manager. John Wiley & Sons.
Nicholas, J.M. and Steyn, H., 2017. Project management for engineering, business and technology. Taylor & Francis.
Vom Brocke, J., Petry, M. and Gonser, T., 2016. Business process management. In A Handbook of Business Transformation Management Methodology (pp. 137-172). Routledge.
Myer Holdings Ltd, 2018. Available through: <https://au.finance.yahoo.com/quote/MYR.AX/balance-sheet?p=MYR.AX> [Accessed on 19th May 2018].
Reason for drop in sale of Myer, 2018. Available through: < https://www.smh.com.au/business/companies/myer-profits-slump-as-stocktake-sale-flops-shares-hit-all-time-low-20180209-p4yzsi.html > [Accessed on 19th May 2018].
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