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Financial Management (MBA) - Essay Example

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Summary
Currently there are two main projects that are being considered by Pleasure Craft. One is the front-end loader project, whereas the other is called outbound motor project. For the purpose of this comparison, there are a few steps that would help assess the NPV and IRR of both projects…
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Financial Management (MBA)
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Download file to see previous pages The project's cost of equity stands at 13.08% and it is calculated by using the equation of CAPM. In this analysis the average beta is 1.48 and it shows that the project also bears some risk. Market risk premium is calculated by using the geometric average prices of the stock from 1973 to 2000.
In the early part, the cash flow is slightly vulnerable because it recovers the initial cost outlay associated with the project, but later the project's net cash flow is in the positive zone which in the end makes a strong reflection on the NPV and the IRR of the project.
Cost of capital stands at 10.44%, which is higher than the other project primarily due to the high debt financing which would leverage the firm's net income and also increases the costs associated with debt financing.
The NPV of the project is $36,367,676 which is quite solid as far as the project valuation is concerned and the IRR provides a rate of return equivalent to 24.70% which is lower in comparison with the other project.
It is reviewed that the project's cash flow stream is in positive zone throughout the period. The cash flow of the whole project's life increases gradually year by year because the profit overcomes all the cost associated with the project.
The ultimate decision criteria would be to proceed with Front End Loader Project. ...
iated with the project, but later the project's net cash flow is in the positive zone which in the end makes a strong reflection on the NPV and the IRR of the project.
OUTBOARD MOTOR PROJECT
The facts related with the Outboard Motor Project are disclosed below:
Due to heavy debt financing of 70%, the project's cost of debt is high with a 4.82% which in the end makes an impression on the cost of the capital of the project.
Cost of capital stands at 10.44%, which is higher than the other project primarily due to the high debt financing which would leverage the firm's net income and also increases the costs associated with debt financing.
The NPV of the project is $36,367,676 which is quite solid as far as the project valuation is concerned and the IRR provides a rate of return equivalent to 24.70% which is lower in comparison with the other project.
It is reviewed that the project's cash flow stream is in positive zone throughout the period. The cash flow of the whole project's life increases gradually year by year because the profit overcomes all the cost associated with the project.
CONCLUSION
The ultimate decision criteria would be to proceed with Front End Loader Project. This type of expansion bears a greater positive Net Present Value as compared to the outboard project, and since the company primarily focuses on NPV to make these capital decisions Front End Loader clearly adds more value. Assuming that the sales projections are correct, and after accounting for the initial cash outlay, the operating costs and maintenance, the discounted cash flow over the life of the project and after factoring in the depreciation of assets and their disposition value, the NPV of the outboard motor project is $ 36,367,676 which is no where close to the NPV of Front end loader, ...Download file to see next pagesRead More
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