|
Initial Investment |
Alternative 1 |
Alternative 2 |
|
Cost of asset |
$ 90,000.00 |
$ 100,000.00 |
|
additional cost |
$ – |
$ 10,000.00 |
|
Total cost |
$ 90,000.00 |
$ 110,000.00 |
|
Proceeds from sale of old machine |
$ (20,000.00) |
|
|
tax on sales |
$ 8,000.00 |
|
|
Changes in working capital |
$ 15,000.00 |
$ 22,000.00 |
|
Total investment |
$ 105,000.00 |
$ 120,000.00 |
|
Alternative 1 |
0 |
1 |
2 |
3 |
4 |
5 |
|
REVENUE |
$ 1,000,000.00 |
$ 1,175,000.00 |
$ 1,300,000.00 |
$ 1,425,000.00 |
$ 1,550,000.00 |
|
|
LESS CASH EXPENSES |
$ 801,500.00 |
$ 884,200.00 |
$ 918,100.00 |
$ 943,100.00 |
$ 968,100.00 |
|
|
PROFIT BEFORE DEPRECIATION AND TAXES (PBDT) |
$ 198,500.00 |
$ 290,800.00 |
$ 381,900.00 |
$ 481,900.00 |
$ 581,900.00 |
|
|
LESS DEPRECIATION |
$ 18,000.00 |
$ 28,800.00 |
$ 17,100.00 |
$ 10,800.00 |
$ 10,800.00 |
|
|
PROFIT BEFORE TAX |
$ 180,500.00 |
$ 262,000.00 |
$ 364,800.00 |
$ 471,100.00 |
$ 571,100.00 |
|
|
LESS TAXES |
$ 72,200.00 |
$ 104,800.00 |
$ 145,920.00 |
$ 188,440.00 |
$ 228,440.00 |
|
|
PROFIT AFTER TAX (PAT) |
$ 108,300.00 |
$ 157,200.00 |
$ 218,880.00 |
$ 282,660.00 |
$ 342,660.00 |
|
|
+DEPRECIATION |
$ 18,000.00 |
$ 28,800.00 |
$ 17,100.00 |
$ 10,800.00 |
$ 10,800.00 |
|
|
CASH FLOW (CF) |
$ (105,000.00) |
$ 26,300.00 |
$ 36,000.00 |
$ 35,980.00 |
$ 43,460.00 |
$ 33,460.00 |
|
NPV |
$ 26,153.26 |
|||||
|
IRR |
19% |
|||||
|
MIRR |
15% |
|||||
|
Cumulative cash flow |
$ (105,000.00) |
$ (78,700.00) |
$ (42,700.00) |
$ (6,720.00) |
$ 36,740.00 |
$ 70,200.00 |
|
Payback period |
3.15 |
|||||
|
Discounting rate |
1.00 |
0.91 |
0.83 |
0.75 |
0.68 |
0.62 |
|
Dis cash flow |
(105,000.00) |
23,909.09 |
29,752.07 |
27,032.31 |
29,683.76 |
20,776.03 |
|
Dis cumulative cash flow |
(105,000.00) |
(81,090.91) |
(51,338.84) |
(24,306.54) |
5,377.23 |
26,153.26 |
|
Discounted payback period |
3.82 |
|
Alternative 2 |
0 |
1 |
2 |
3 |
4 |
5 |
|
REVENUE |
$ 1,000,000.00 |
$ 1,175,000.00 |
$ 1,300,000.00 |
$ 1,425,000.00 |
$ 1,550,000.00 |
|
|
LESS CASH EXPENSES |
$ 764,500.00 |
$ 839,900.00 |
$ 914,900.00 |
$ 989,900.00 |
$ 998,900.00 |
|
|
PROFIT BEFORE DEPRECIATION AND TAXES (PBDT) |
$ 235,500.00 |
$ 335,100.00 |
$ 385,100.00 |
$ 435,100.00 |
$ 551,100.00 |
|
|
LESS DEPRECIATION |
$ 22,000.00 |
$ 35,200.00 |
$ 20,900.00 |
$ 13,200.00 |
$ 13,200.00 |
|
|
PROFIT BEFORE TAX |
$ 213,500.00 |
$ 299,900.00 |
$ 364,200.00 |
$ 421,900.00 |
$ 537,900.00 |
|
|
LESS TAXES |
$ 85,400.00 |
$ 119,960.00 |
$ 145,680.00 |
$ 168,760.00 |
$ 215,160.00 |
|
|
PROFIT AFTER TAX (PAT) |
$ 128,100.00 |
$ 179,940.00 |
$ 218,520.00 |
$ 253,140.00 |
$ 322,740.00 |
|
|
+DEPRECIATION |
$ 22,000.00 |
$ 35,200.00 |
$ 20,900.00 |
$ 13,200.00 |
$ 13,200.00 |
|
|
CASH FLOW (CF) |
$ (120,000.00) |
$ 50,100.00 |
$ 65,140.00 |
$ 39,420.00 |
$ 16,340.00 |
$ 15,940.00 |
|
NPV |
$ 30,054.92 |
|||||
|
IRR |
22% |
|||||
|
MIRR |
15% |
|||||
|
Cumulative cash flow |
$ (120,000.00) |
$ (69,900.00) |
$ (4,760.00) |
$ 34,660.00 |
$ 51,000.00 |
$ 66,940.00 |
|
Payback period |
2.12 |
|||||
|
Discounting rate |
1.00 |
0.91 |
0.83 |
0.75 |
0.68 |
0.62 |
|
Dis cash flow |
(120,000.00) |
45,545.45 |
53,834.71 |
29,616.83 |
11,160.44 |
9,897.49 |
|
Dis cumulative cash flow |
(120,000.00) |
(74,454.55) |
(20,619.83) |
8,996.99 |
20,157.43 |
30,054.92 |
|
Discounted payback period |
2.70 |
From the evaluation of both the alternative options relevant income that is generated from investment could be identified. The investment options are mainly evaluated with the help of MIRR, NPV, IRR, payback period, and discounted payback period, where alternative 2 is mainly selected for investment. The NPV of alternative 2 is mainly at the levels of $30,054.92, while alternative 1 has NPV of $26,153.26. Moreover, IRR of alternative 1 is at 19%, while alternative 2 has 22%. In addition, MIRR of alternative 1 is at the levels of 15%, while for alternative 2 it is at 15.03%. Furthermore, payback period for alternative 1 is at 3.15 years, while for alternative 2 it is at 2.12 years. On the other hand, the discounted payback period for alternative 1 is at 3.82 years and for alternative 2 it is at levels of 2.70 years.
Hence, from the evaluation of above investment appraisal techniques alternative 2 is mainly identified to be the most appropriate option for investment, which could help in generating higher rate of return from investment. Clark Upholstery Company needs to adopt alternative 2 for increasing their income form investment and raise their revenue levels. In this context, Baum & Crosby (2014) mentioned that with the use of investment appraisal techniques companies can generate higher rate of return from investment. However, Vesty, Telgenkamp & Roscoe (2015) argued that investment appraisal techniques mainly lose th9ier friction if financial managers do not estimate adequate values for the project.
Reference:
Baum, A. E., & Crosby, N. (2014). Property investment appraisal. John Wiley & Sons.
Vesty, G. M., Telgenkamp, A., & Roscoe, P. J. (2015). Creating numbers: carbon and capital investment. Accounting, Auditing & Accountability Journal, 28(3), 302-324.
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