Discuss about the Process Of Analyzing Project Ideas And Finance.
Project selection is the process of analyzing project ideas and selecting the one with the most viability. To determine what projects to undertake and which ones not to undertake, businesses can consider using the investment appraisal techniques which include the Net Present Value (NPV), the Internal Rate of Return (IRR), the Profitability Index (P.I), the accounting rate of return (ARR) and the payback period (PBP). Ideally, these methods would help a business determine whether a project is viable or not (Williamson, 1987, p.136).
First, when using the NPV, the business can compare the present value of cash inflows with those of cash outflows (Rossi, 2015, p.53). If the present value of cash inflows is more than the initial cost outlay, then the project would be worthwhile to invest in. However, if the present value of cash inflows is less than the present value of cash outflows, the project would not be a viable investment and thus the business should avoid. Second, when using the IRR, a business can compare the IRR rate computed to the discounting rate (Olson and Wu, 2017, p.120). Here, if the IRR is higher than the discounting rate, then the project would be viable. On the other hand, if it is lower than the discounting rate, the project would not be a viable investment and the management should consider avoiding it. Third, the profitability index is computed by taking the present value of cash inflows divided by the initial outlay cost (Lee, Park and Shin, 2009, p.5881). If the profitability index is greater than one, the business should accept the project. However, if it is less than one, the management should consider avoiding the project. Fourth, when using the ARR, the business should consider whether the project has a positive ARR or not (Kleimeier and Megginson, 2000, p.76). If the project has a positive ARR, the business should accept the project. On the other hand, if the project has a negative ARR, the business should avoid the project. Lastly, the PBP should be compared with the one set by the management. If the PBP is higher than the management’s set PBP, the project would not be worthwhile to invest in and thus the business should avoid it. However, if it is less than the one set by the management, the project would be viable.
Cost management is the process of planning and controlling the costs budgeted by a business. Ideally, when dealing with projects, a project manager is hired to plan and control those costs related to the project. Managing costs in a project are essential. Here, the project cost management method is used (Kerzner, 2017, n.d.). This method uses technology to help measure any costs that would arise in the life cycle of a project. Its main roles are an estimation of costs, a collection of field data, control of job orders, scheduling, design, and accounting. Ultimately, project cost management (PCM) helps complete the project within costs and on time since if the project is not completed within the set schedule, it would mean that its costs cannot be met and therefore the project manager would have to control the costs of the project using the Project Cost Management (PCM) method, thus enabling the project to be completed within the set budget (Diamond, 1984, p.394). The Project Cost Management (PCM) is important since it helps the company to be able to complete the project within the set budget, thus preventing issues such as the crushing of the project and injecting of additional resources that had not been planned for into the business from arising. To manage project costs effectively, four strategies or approaches can be used, that is, proper planning of the costs to be incurred, estimation of the costs that would be incurred by the business in relation to the project, determining of a proper budget for the project (the revenues, incomes and expenditure associated with the business) and proper control of project costs (Demirag, 2017, p.78). By doing this, the business would ensure that they are able to complete the project within the set budget.
When a business wants to invest in a project, they can source for funding from several sources which would assist them to fund the proposed new projects. These sources of financing include savings, venture, and angel capitalists, borrowing from banks, government grants and subsidies, equity shareholders or going public (initial public offering). First, a business can fund a new project from their savings or retained earnings (Delmon, 2009, n.d.). These are the amounts of profits that are held by a company instead of being paid out as dividends. The advantage of this is that the business would be able to get their desired funds without outsourcing from other sources such as venture capitalists, angel capitalist, and equity shareholders. Besides, retained earnings when used to fund a project does not add up to the debt profile of a company and therefore it can be used as a powerful strategy. However, using the retained earnings available in the business may lead to the depletion of the internally available resources, thus the business may lack funds for its core operations.
Second, a business can fund a new project using venture and angel capitalists (Adrian, Covitz, and Liang, 2015, p.358). Ideally, venture capitalists are private equities that provide financing to firms to enable them to grow while angel capitalists are a branch of venture capitalists who inject their capital in the business to enable the business to sustain its operations. The advantage of this is that the company would be able to get their desired funds to enable them to fund the project. However, the venture capitalists and angel capitalists would exercise great control over the business since they would want to be the sole decision-makers in the project.
Third, the business could fund its project through borrowings from a bank (Adrian, Covitz, and Liang, 2015, p.359). Here, the business would be able to get their desired funds thus being able to successfully pursue the project. However, at the end of their financial year, the company would be required to repay the interest obligations in relation to the debt, and eventually, pay up the debt after a designated period as stated by the terms and conditions of the loan acquired.
Fourth, the business would acquire funds from government grants and subsidies (Adrian, Covitz, and Liang, 2015, p.360). Here, the government comes in to help small and medium enterprises by providing grants and subsidies to them to enable them to grow in their harsh and competitive environments. This would have some implications for the project. For the positive impact on the project, the business would be in a position to get the desired funds in order to complete the project successfully. Besides, the government would be able to provide the business with aid, not only financially, but also technological, connections as well as other aid and advice the business might need. However, the majority of the revenue made from the business would be used in government projects since the government would have control over the business.
Lastly, the business could offer shares to private investors (equity shareholders) or go public in order to get the desired funds to invest in the project (Adrian, Covitz, and Liang, 2015, p.361). Here, the business would be issuing shares for cash and at the end of the financial year, they would be required to pay their equity shareholders some returns in the form of dividends. The advantage of this is that the company would be in a position to acquire the desired funds for the project and they would not be required to repay the debt. However, they would be required to pay dividends to the shareholders, thus resulting in more expenses to the business.
When commencing a project, the business would need to determine the staff and the resources required and how much time would be needed to complete the project successfully. This would be an issue since it would involve a lot of estimations and budgeting. These issues are important since they would assist the business to complete the project successfully (Williamson, 1987, p.137). The staff and the resources employed would help the direct effort to the project while timing would help the management to plan themselves so that the project can be completed successfully. When the project finishes, the company determines whether it has met the goals and objectives of the project or whether the change is needed.
A project is wound up when every activity has been finished and when it is evident that the project meets the goals and objectives of the project. Here, a formal report is written which consists of a formal acceptance of the final product by the company, rewarding the project team members, determining the lessons learnt during the project, releasing the resources of the project and presenting a formal notification of the closure of the project to the hire management (Rossi, 2015, p.54). The project does not just end like that, in fact, the project team members must make resource and infrastructure considerations to determine how much was used, how much was left and whether they had met the set budget. Environmental issues must arise when ending the project such as littering of materials which may lead to pollution of the environment.
According to the sources above, no evidence can be seen that Myer currently has equity capital on the issue. Companies normally raise equity capital in order to be able to get funds to be able to fund their continuing projects or expansion (Smh, 2018a, n.d.). Additionally, firms raise equity capital when they are facing financial difficulties and they do not want to borrow from banks due to the interest obligations that the loans from banks hold. The value of the equity capital of Myer dropped significantly by 50% from $2.4 billion to $400 million due to the fact that its private equity sellers had sold their shares in the company. As a result, the market capitalization of the corporation greatly declined, thus resulting in a reduction in the share price (Smh, 2018b, n.d.). Ideally, this would be an opportune moment for any investor wishing to invest in Myer since an investor ought to invest in a company when the share price is lowest and sell when the share price is highest (Yahoo Finance, 2018, n.d.).
|
Details |
Year1 |
Year2 |
Year3 |
Year4 |
Year5 |
Total |
|
Revenue |
$ 5,500,000.00 |
$ 5,610,000.00 |
$ 5,722,200.00 |
$ 5,836,644.00 |
$ 5,953,376.88 |
$ 28,622,220.88 |
|
Costs |
$ 2,200,000.00 |
$ 2,244,000.00 |
$ 2,288,880.00 |
$ 2,334,657.60 |
$ 2,381,350.75 |
$ 11,448,888.35 |
|
Gross profit |
$ 3,300,000.00 |
$ 3,366,000.00 |
$ 3,433,320.00 |
$ 3,501,986.40 |
$ 3,572,026.13 |
$ 17,173,332.53 |
|
Less: depreciation |
$ 500,000.00 |
$ 500,000.00 |
$ 500,000.00 |
$ 500,000.00 |
$ 500,000.00 |
$ 2,500,000.00 |
|
EBIT |
$ 2,800,000.00 |
$ 2,866,000.00 |
$ 2,933,320.00 |
$ 3,001,986.40 |
$ 3,072,026.13 |
$ 14,673,332.53 |
|
Less: Interest |
$ – |
$ – |
$ – |
$ – |
$ – |
$ – |
|
EBT |
$ 2,800,000.00 |
$ 2,866,000.00 |
$ 2,933,320.00 |
$ 3,001,986.40 |
$ 3,072,026.13 |
$ 14,673,332.53 |
|
Less: tax (40%) |
$ 1,120,000.00 |
$ 1,146,400.00 |
$ 1,173,328.00 |
$ 1,200,794.56 |
$ 1,228,810.45 |
$ 5,869,333.01 |
|
PAT |
$ 1,680,000.00 |
$ 1,719,600.00 |
$ 1,759,992.00 |
$ 1,801,191.84 |
$ 1,843,215.68 |
$ 8,803,999.52 |
|
Add back Depreciation |
$ 500,000.00 |
$ 500,000.00 |
$ 500,000.00 |
$ 500,000.00 |
$ 500,000.00 |
$ 2,500,000.00 |
|
Cash flows |
$ 2,180,000.00 |
$ 2,219,600.00 |
$ 2,259,992.00 |
$ 2,301,191.84 |
$ 2,343,215.68 |
$ 11,303,999.52 |
|
Computation of free cash flow |
|
|
EBIT |
$ 14,673,332.53 |
|
(1-Tax rate) |
0.6 |
|
Depreciation |
$ 2,500,000.00 |
|
Capital expenditure |
$ 10,000,000.00 |
|
Increase in net working capital |
$ 2,000,000.00 |
|
FCF |
$ (696,000.48) |
From the analysis of the free cash flows above, Myers realized a negative free cash flows of $696,000.48. Ideally, a positive free cash flow would be preferred since it would mean that the project would be worthwhile as it would be able to generate profits throughout its useful life. However, a negative free cash flow would mean that the project would not be viable to invest in and therefore the company would realize losses throughout the economic life of the project from investing in it. Based on the analysis above of the free cash flow of Myers, the project realized a negative cash flow which means that it would not be worthwhile to invest in it since the firm would realize losses if it decides to invest in that project.
Net Present Value (NPV) of the Project is One Canadian Dollar is Equivalent to One Australian Dollar
The Net Present Value (NPV) is an investment appraisal technique which is used to determine whether a project is worthwhile or viable to invest in it or not. Ideally, it is calculated by taking the present value of cash inflows minus the present value of cash outflows as shown in the table below.
|
Determination of NPV |
|||
|
Year |
Cash flows |
PVIF, 5% |
PV |
|
1 |
$ 2,180,000.00 |
0.952380952 |
$ 2,076,190.48 |
|
2 |
$ 2,219,600.00 |
0.907029478 |
$ 2,013,242.63 |
|
3 |
$ 2,259,992.00 |
0.863837599 |
$ 1,952,266.06 |
|
4 |
$ 2,301,191.84 |
0.822702475 |
$ 1,893,196.22 |
|
5 |
$ 2,343,215.68 |
0.783526166 |
$ 1,835,970.80 |
|
Total PV |
$ 9,770,866.19 |
||
|
Less: Capital expenditure |
$ 10,000,000.00 |
||
|
NPV |
$ (229,133.81) |
Based on the analysis of the Net Present Value (NPV) of the project, it is evident that the project had a negative net present value of -$229,133.81. Ideally, a positive net present value would mean that the present value of cash inflows is more than the present value of cash outflows which is favorable. On the other hand, a negative net present value would mean that the present value of cash inflows is less than the initial cost outlay which may be considered unfavorable. Since the project that Myer wants to invest in has a negative net present value (NPV), it would not be favorable and thus it would not be viable to invest in.
Net Present Value (NPV) of the Project if the Canadian Dollar Depreciates to One Canadian Dollar is Equivalent to 0.95 Australian Dollar
|
Sensitivity analysis |
||||
|
If the Canadian dollar depreciates to 1 Canadian Dollar is equal to 0.95 Australian Dollars |
||||
|
Determination of NPV |
||||
|
Year |
Cash flows |
PVIF, 5% |
PV |
|
|
1 |
$ 2,071,000.00 |
0.952380952 |
$ 1,972,380.95 |
|
|
2 |
$ 2,108,620.00 |
0.907029478 |
$ 1,912,580.50 |
|
|
3 |
$ 2,146,992.40 |
0.863837599 |
$ 1,854,652.76 |
|
|
4 |
$ 2,186,132.25 |
0.822702475 |
$ 1,798,536.41 |
|
|
5 |
$ 2,226,054.89 |
0.783526166 |
$ 1,744,172.26 |
|
|
Total PV |
$ 9,282,322.88 |
|||
|
Less: Capital expenditure |
$ 10,000,000.00 |
|||
|
NPV |
$ (717,677.12) |
This part of the question performs a sensitivity analysis to determine what would happen to the net present value (NPV) if the Canadian dollar was to depreciate against the Australian dollar. In this scenario, it was assumed that the Canadian dollar depreciated to one Canadian dollar is equal to $0.95 Australian dollars. On applying this to the cash flows, it is evident that they decreased in value as seen in the table above. Ultimately, the overall net present value (NPV) was -$717,677.12 which was much lower than the one computed in the previous part. My decision would still remain the same since I had rejected the project due to the fact that its net present value (NPV) was still negative in the previous part. Having a negative NPV would imply that the project would realize losses and the management would not be able to recoup their initial cost outlay, thus implying that the project would not be worthwhile or viable to invest in.
My advice would be that Myer should desist from investing in the project. Apparently, this is because the project would realize a negative free cash flow (FCF) and a negative Net Present Value (NPV). Additionally, the seasonality in the market or industry may greatly affect it as seen in the sensitivity analysis. If the company invests in the project, there is a high likelihood that they would realize losses since this would not be a worthwhile or a viable project to invest in.
Conclusion
From the analysis of Myer, all the factors of project selection do not favor the company. The project that Myer wishes to invest in has a negative NPV, and negative free cash flows and thus its viability may be uncertain. Myer should, therefore, not continue with the other steps, that is, cost management, funding, implementation and winding up of the project since it is not a worthwhile investment. Myer is advised to desist from investing in the project.
References
Adrian, T., Covitz, D. and Liang, N., 2015. Financial stability monitoring. Annual Review of Financial Economics, 7, pp.357-395. [Accessed on 30th May 2018].
Delmon, J., 2009. Private sector investment in infrastructure: Project finance, PPP projects, and risks. Kluwer Law International. [Accessed on 30th May 2018].
Demirag, I., 2017. A framework for examining accountability and value for money in the UK’s private finance initiative. In Corporate Social Responsibility, Accountability and Governance (pp. 77-92). Routledge. [Accessed on 30th May 2018].
Diamond, D.W., 1984. Financial intermediation and delegated monitoring. The review of economic studies, 51(3), pp.393-414. [Accessed on 30th May 2018].
Kerzner, H., 2017. Project management metrics, KPIs, and dashboards: a guide to measuring and monitoring project performance. John Wiley & Sons. [Accessed on 30th May 2018].
Kleimeier, S. and Megginson, W.L., 2000. Are project finance loans different from other syndicated credits? Journal of Applied Corporate Finance, 13(1), pp.75-87. [Accessed on 30th May 2018].
Lee, E., Park, Y. and Shin, J.G., 2009. Large engineering project risk management using a Bayesian belief network. Expert Systems with Applications, 36(3), pp.5880-5887. [Accessed on 30th May 2018].
Olson, D.L. and Wu, D.D., 2017. Data Mining Models and Enterprise Risk Management. In Enterprise Risk Management Models (pp. 119-132). Springer, Berlin, Heidelberg. [Accessed on 30th May 2018].
Rossi, E., 2015. Bank Conventional Lending versus Project Bond Solution. In Infrastructure Project Finance and Project Bonds in Europe (pp. 52-62). Palgrave Pivot, London. [Accessed on 30th May 2018].
Smh, 2018a, Shrink or Die: The Grim Choice Facing Myer, The Sydney Morning Gerald. [Online]. Available at https://www.smh.com.au/money/investing/shrink-or-die-the-grim-choice-facing-Myer-20180227-p4z1xr.html [Accessed on 30th May 2018].
Smh, 2018b, Myers Profits Slump as Stocktake Sales Flop; Shares Hit an All-Time Low, The Sydney Morning Gerald. [Online]. Available at https://www.smh.com.au/business/retail/myer-profits-slump-as-stocktake-sale-flops-shares-hit-all-time-low-20180208-p4yzsi.html/ [Accessed on 30th May 2018].
Williamson, S.D., 1987. Costly monitoring, loan contracts, and equilibrium credit rationing. The Quarterly Journal of Economics, 102(1), pp.135-145. [Accessed on 30th May 2018].
Yahoo Finance, 2018, Myer Holdings Limited. [Online]. Available at https://au.finance.yahoo.com/quote/MYR.AX/[Accessed on 30th May 2018]
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download