The case explains about a project of the ACT (Australian Capital Territory). The government wants to expand and improve the airport of Canberra. The government wants to reconstruct the nearby area of the road whereas the other option of the company is to do nothing and make the minor changes in order to upgrade the performance of the airport. In the case, the financial and economical perspective of the business has been evaluated in order to measure the performance of the project and make better decision about the position of the business.
1.In this question, the urban department’s services and the project have been undertaken. The case represents the K1 option and K2 option in order to identify the performance of the business. While performing the task, following assumptions have been made in the business in order to identify the net present value of the business:
Net present value:
Net present value of the business has been studied firstly and it has been recognized that how much present value of the future cash inflows and outflows of the business are so that a better decision could be made about the acceptance of the business. The net present value on both the projects of the company has been done to identify that whether the project must be accepted by the government or not (Lee and lee, 2006).
Financial perspective:
In case of K1 project, it has been identified that the total cash inflows of the business would be $ 91.29 million and the total cash outflows of the business for the 30 years would be $ 106.85 million. It describes that if the government would invest into this project than the total present value of the future cash flows of the business would be $ -15.56 million which represents that the project is not a good idea in context to the financial performance and management of the business. It also explains that if the investment would be done in project K1 than it would lead to the business towards worst performance and the loss level of the business would also be higher (Lumby and Jones, 2007).
Further, in case of K2 project, it has been identified that the total cash inflows of the business would be $ 91.29 million and the total cash outflows of the business for the 30 years would be $ 12.36 million. It describes that if the government would invest into this project than the total present value of the future cash flows of the business would be $ 78.93 million which represents that the project is a better idea in context to the financial performance and management of the business. It also explains that if the investment would be done in project K1 than it would lead to the business towards higher financial performance and the profit level of the business would also be higher.
On the basis of the evaluation, it could be said that the financial perspective is in the favour of the project K2 which explains that minor changes must be done in order to upgrade and manage the airport.
Economical perspective:
Further, the study has been done on the economical perspective of the business to identify the economical changes and the economical performance of both the projects, in case of project K1, it has been found that the changes into the airport and the upgrade in the nearby area of the airport would improve the tourism level of the country as well as it is better option to improve the revenues of the government of the country. On the basis of the upgrade, the travel timing of business and private would be reduced (Madura, 2014). The project would make it easier for the citizen to access better place and make it easier to live an accident free life. The household would also be satisfied with the changes because of better environmental options. As well as, if the inflation rate and other factors of the business are taken into concern than it has been found that the inflation rate would be improved in near future so the current investment would be less costly for the business and improve the economical position of the business.
In addition, a study has also been done on the project K2. Through the study on the economical factors and its impact on the economical performance of the country, it has been found that the changes into the minor changes into the report and nearby area of the airport would be helpful to manage the current scenario but it would not be much attractive for the tourism and the travellers of the country. On the basis of the no upgrade case, the travel timing of the individuals and business people would not be reduced (Kaplan and Atkinson, 2015). As well as, if the inflation rate, pollution cost and other factors of the country would be improved in near future so the current investment would be less costly for the business and improve the economical position of the business.
It explains that on the basis of the economical perspective, the project K1 is better option. Now the government has to make decision about the project on the basis of the financial and economical performance of the business.
Relevance of inflation rate:
The inflation rate is a phenomenon which affects the purchasing power and the revenue of a business, It improves the cost level of the business which reduces the purchasing power of the customer and the profit level of the business, It affects the future cash flows of the business, the inflation rate or the discount rate are used in the business to identify the net present value of the future cash flows of the business. This is one of the most used rates to measure that how much changes would be occurred into the worth of the currency and what would the future value of the net cash flows or vice versa. The relationship of NPV and IRR could be understood through below given formula:
Nominal Discount Rate = (1 + Real Discount Rate) (1 + Inflation Rate) – 1
≈ Real Discount Rate + Inflation Rate (Lord, 2007)
This rate is used to discount the future cash flows to measure the present value of those cash flows of the business.
Relevance of borrowing rate:
The borrowing rates describe about the total return which could be got by the investors from the market without indulging into any kind of risk of the business. These rates are known as risk free rate of the business which is used while evaluating a project in order to identify the total discount rate of the business (Kaplan and Atkinson, 2015). the cost of capital is determines on the basis of the risk free rate which is denotes as the discount rate on the basis of which the future cash flows are denotes as the present value off future cash flows.
Relevance of generated traffic:
Generated traffic stands for the total traffic and his cars which would be driven in the roads and would improve the revenue of the project. The more the traffic of the business would be, the more, it would be easier for the business to manage and improve the financial and economical performance of the business.
Opportunity cost:
Opportunity cost stands for the loss of other alternatives which has been occurred in a business in order to choose the other available alternative of the business. It represents about the benefits which has been ignored by the business in order to gain the benefits from the other projects. The opportunity cost of the business must be lower than the actual revenue of the business (Horngren, 2009).
If in case the residential property would be acquired by the business in order to upgrade the projects and the airport area than the total rent from that projects is the opportunity cost of the business which would cause the loss to the government. The government is required to measure that the total revenue from the residential property is lower than the project otherwise the chosen project of the business would be a failure in terms of the financial perspective of the business.
Do nothing case:
In case of project K2, the study on the economical factors has been studied. And it has been found that the minor changes into the road and nearby area of the airport would be helpful to manage the current scenario but it would not be much attractive for the tourism of the country. The case explains that the project K1 would contribute around $ 50 million in the total economy of the business which could improve the level of the economy at a great level. However, if the investment would not be done in the project than the economic performance of the business would be same (Lee and lee, 2006). As well as, if the inflation rate and other factors of the business are taken into concern than it has been found that the inflation rate would be improved in near future so the current investment would be less costly for the business and improve the economical position of the business. So, it explains that the “Do nothing case” of the government is not at all good in terms of the economical performance of the business.
2.Key issues:
The key issues related to each of the project of the government are as follows:
|
Project K 1 |
Project K 2 |
|
Strength: · Economical performance of the business is quite impressive. · The opportunity cost of the project is lower · The earnings from the project are quite impressive. · The traffic rate in the project is higher than the project K2 (Hillier, Grinblatt and Titman, 2011) |
Strength: · Financial performance of the business is quite impressive · The earnings from the project is quite impressive · The cost level of the project is quite lower. · The present value of the future cash flows of the business are positive |
|
Weakness: · Financial performance of the business is not at all good · The loss level of the project is quite higher · The inflation rate of the country is higher |
Weakness: · Economical performance of the business is not at all good · The opportunity cost of the business is higher · The inflation rate of the country is higher (Higgins, 2012) |
Relevance of industrial park:
The project explains that the $ 100 million has been proposed by the government for the industrial park near by the airport. The investment into the park is proposed in order to improve the tourism level of the country as well as it is better option to meet the corporate social responsibilities (Gapenski, 2008).
In case of the spin off effect, it has been measured the second economical effect of the businesses through the spin off effect, it has been measured that if the project would be accepted by the business than the economical performance would be improved by $ 50 million but if the “do not case” is opted by the business than the economical level of the business would be similar.
Further, in case of financial and non financial perspective of the business, it has been measured that “Do not case” is better for the country in current scenario, the project could be accepted by the business later on.
Conclusion:
To conclude, it is important for business so the government to measure each of the project in terms of financial and non financial to make better decision, In this case it is concluded that “Do not case” is better for the country in current scenario, the changes in the airport and road could be done later on in order to improve the economical performance of the country.
References:
Gapenski, L.C., 2008. Healthcare finance: an introduction to accounting and financial management. Health Administration Press.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Hillier, D., Grinblatt, M. and Titman, S., 2011. Financial markets and corporate strategy. McGraw Hill.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lee.C.F and Lee, A, C,.2006. Encyclopedia of finance, Springer science, new York
Lord, B.R., 2007. Strategic management accounting. Issues in Management Accounting, 3.
Lumby,S and Jones,C,.2007. Corporate finance theory and practice, 7th edition, Thomson, London
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
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