Coventry University - Benefits of Waste Recycle - Case Study Example

Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: RECYCLING PROJECT Investment appraisal involves deciding on the best investment or project to pursue. This is an important activity since it requires a commitment of huge amounts of funds. There can be many viable projects that an investor can pursue. However, the capital available may not be enough to pursue all the viable projects immediately. This indicates that the investor has a task of deciding on the project that will be best in terms of profitability and cost minimization.The investor will only pursue a project that gives high positive returns compared to the rest. The approaches available for the determination of these returns are the ones we call project investment appraisal techniques. The main objective of these approaches is to make the investor decide on whether or not to undertake a project. However, each of the approaches is suitable in different circumstances. This may be due to the availability or unavailability of certain factors. Similarly, the choice of which approach to use will be based on the advantages offered over the other factors. Most advisors will however recommend the net present value approach as the best approach. This will be discussed further in the article (LANGDON 2002). The article focuses on Coventry University in trying to explain the benefits of waste recycle. It closely analyzes the importance of basing your project investment appraisal on net present value rather than using the other techniques.It gives answers to four basic questions; calculation of net present value and the interpretation, the importance of using net present value approach in project investment appraisal, the importance of energy accounting, and finally the benefits accruing to Coventry University for taking part in the recycle project. a) Net Present Value of a project is the discounteddifference between cash inflows and cash outflows. It is determined for lump sum amounts as well as annuity amounts. It is a method based on the opportunity cost and the value added on the wealth of shareholders by undertaking one project and foregoing another one. Generally, the formula for its determination is given by; NPV = -C0 + C1/(1+r) + C2/(1+r)2 + Cn/(1+r)n = ∑ Cn (1 + r)-n Where; NPV-net present value ; C0- the cash outflow at the start of the project ; C1, C2.... Cn- the forecasted cash flows for n years ;n- The number of years of project existence ; r- The required rate of return The criterion to be used in accepting or rejecting the project is the sign. A positive figure is accepted while a negative figure is rejected. If the result is zero, then other factors should be considered in making the decision. Cash inflow values for the Project Recycle Total Year 1 2 3 4 5 6 7 8 9 10 Revenues 2.72 3.26 3.91 4.69 5.64 6.78 8.15 9.81 11.81 14.23 70.99 Variable costs (1.00) (1.21) (1.46) (1.76) (2.13) (2.57) (3.10) (3.74) (4.52) (5.46) Contribution 1.72 2.05 2.45 2.93 3.51 4.21 5.05 6.07 7.29 8.77 Fixed costs (1.00) (1.05) (1.10) (1.16) (1.22) (1.28) (1.34) (1.41) (1.48) (1.55) Cash flows 0,72 1.00 1.35 1.77 2.29 2.93 3.71 4.66 5.81 7.22 Workings: 1. Total revenue =units produced per annum * unit price per annum Given that the units produced increased by 15% every year. 80% of produce were transmitted to local organizations and 20% transmitted to the national grid, then; Revenue= (units to local orgs*unit price for local orgs) + (units to national grid*unit price for national grid) 2. Variable cost =unit variable cost*number of units produced Given that the unit variable cost increases by 6% every year. 3. Contribution This is the difference between the revenue per annum and the variable cost per annum. This is given by; =Revenue-variable costs 4. Fixed costs This is given as 1 million in year 1 and is expected to increase by 5% in the subsequent years. 5. Cash flows Since there is no tax liability on the project, the cash flows are simply obtained by subtracting the fixed costs from the contribution amount. The depreciation charges will not affect our cash flow values since it is a non-cash item. Net Present Value of cash flows Year Cash flows (million pounds) Discount rate factor@10% (PVIF@10%n) Discounted cash flows (PVcf) 0 (6) 1.0000 (6) 1 0.72 0.9091 0.654545 2 1.00 0.8264 0.82644 3 1.35 0.7513 1.014255 4 1.77 0.6830 1.20891 5 2.29 0.6209 1.421861 6 2.93 0.5645 1.653985 7 3.71 0.5132 1.903972 8 4.66 0.4665 2.17389 9 5.81 0.4241 2.464021 10 7.22 0.3855 2.78331 NPV( sum of PVs) = 10.1052 Note: The detailed calculations for both the cash flows and the net present value have been done in the attached excel spread sheet. The C0 represents the amount of initial investment. It is always negative since it represents cash out flow used to pay for the initial costs of investing.The net present value of a project is a measure of how profitable a given project or an investment will be. From the excel sheet calculations, the net present value of the project has been determined to be 10.1052 million pounds. This is a positive figure. This is an indication that the project will be profitable if undertaken. Where the net present value result is positive, accept the project since the cash inflows exceeds cash outflows. However, the managing director must also include the savings made by not buying at the current market price of 2.5pounds per unit. Cost Analysis: Year Total project costs Commercial price of energy Savings 1 2.00 5.00 3.00 2 2.26 5.75 3.49 3 2.56 6.625 4.065 4 2.92 7.6 4.68 5 3.35 8.75 5.40 6 3.85 10.05 6.20 7 4.44 11.575 7.135 8 5.15 13.30 8.15 9 6.00 15.30 9.30 10 7.01 17.6 10.59 Total 101.55 Total project cost Variable costs + fixed costs =70.99 (as calculated above) Total commercial price of energy per year Unit price per annum * produce per annum =101.55 From the above analysis, it is evidence that the cost of initiating the project will be much lower compared to the gains expected from the same project and also cheaper than having to buy energy at the commercial price every year. The local organizations plus the national grid will also pay a total of 70.99 million dollars in order to access the energy generated from the recycle project rather than paying the total of 101.55 million pounds to obtain energy at the commercial price. This savings will benefit both the local organizations and the national grid. Therefore the project is not only financially fit but also efficient in terms of performance. The savings from the project can be calculated as; = (101.55-70.99)/101.55 = 0.3009*100 = 30.09% The managing director of the project should therefore proceed with the project to completion since it gives a positive net present value, and also leads to savings in terms of the unit price of buying energy. b) There are various methods that can be used in investment appraisal. They include; internal rate of return, payback period, accounting rate of return, profitability index and the net present value technique. The choice of a technique greatly depends on the management decisions and the policies governing investment appraisal in an organization. It also depends on the company position in terms of knowledge of the various techniques. A company will only employ the technique that it can easily and comfortably employ. Capital appraisal can be best done by using the net present value approach. This is because net present value technique takes into consideration the time value of money. The approach also considers the cash flows before and after the lifespan of the project. This approach also uses absolute values and therefore takes into account all the differences between projects even if their internal rates of return are the same. It ensures economies of scale. Even though net present value technique uses a single rate for both inflows and outflows, it considers the practicability of the chosen rate in relation to the real market rates. Unlike some of the approaches, net present value cannot result in more than one possible answer thus avoids the problem of multiple projects and the chances of failing to identify a project. Other than the above reasons, net present value is also a simple method to use and understand. The interpretations are also simple since it gives straight forward results. The method is also a widely recognized technique and the level of accuracy is also high. It also eliminates the errors that can be encountered by using the accounting rate or return technique since it does not base its calculations on the profit figures but rather the cash flows (HOPKINSON 2017). c) Energy accounting is of great importance to the world economy. It is necessary that the amount of energy consumed by individual households and all other complex institutions be determined. This ensures that limited energy is wasted and that much energy is channeled towards the most critical sectors. Energy accounting can therefore be done using either conventional cost accounting approach, or energy sensitivity approach of flow cost accounting models. Most organizations have the objective of managing and controlling the supply and consumption of energy, the losses, costs and efficiency of energy consumption. The process of identifying, and analyzing the demand and supply of energy to various sectors of the organization is what contributes to accounting. The approach used will determine the costs related to the desired and undesired flows of energy. Energy cost accounting also enables a company to give the accurate cost information which is related to energy usage (LIBRARY OF CONGRESS 1976). d) By engaging itself with this energy recycle project, Coventry University is getting involved with matters that are of great concern to the community. This is a community project that will result into less energy being wasted and more people saving money by using cheap quality energy. This will make its relationship with the society improve and thus good rapport being built with the society. Secondly, this project is one that leads to realization of new techniques of energy saving. The school management will be more enlightened on better ways of saving energy since it is a big institution with more energy needs. The institution will learn to recycle its own energy thus become independent of other energy sources. The university will also gain from being the project developers. Since this is their own project, they have a right to help in setting energy prices that are more favorable thus putting their project at a competitive edge in the market. The project also counts as one of the corporate social responsibilities undertaken by the university. The university also uses this as a way of enlightening the students and staff on issues of energy accounting and practically starts a project that will enhance the livelihoods of both students, staff and the entire school community. In addition to these benefits, the school also creates an opportunity of it having a personal energy accounting software that will suit the energy needs of the school. This software is meant to be a utility bill tracking device. It also enables the university to reach its objective of having an optimal energy accounting solution. The advantage is that the school will be able to identify the software that is very compatible in order to avoid cases of reinstallation of energy software or idleness of resources due to incompatibility. References HOPKINSON, M. (2017). Net present value and risk modelling for projects. Retrieved from: http://www.worldcat.org/oclc/921994967 LANGDON, K. (2002). Investment appraisal. Oxford, England, Capstone Pub. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=71295. LIBRARY OF CONGRESS, & GUSHEE, D. E. (1976). Energy accounting as a policy analysis tool. Washington, U.S. Govt. Print. Off. Read More