Contents

Abstract .............................................................................................................. Error! Bookmark not defined.

1. Introduction .............................................................................................................................................. 3
2. Calculation and Equations. .................................................................................................................... 3
2.1 Net Present Value (NPV): .................................................................................................................. 3
2.2 Internal Rate of Return (IRR) ............................................................................................................. 4
2.3 Payback Period ................................................................................................................................... 5
3. Investment projects options ................................................................................................................... 6
3.1 Recommendation and Evaluations.................................................................................................... 6
3.3 Non-Financial consideration.................................................................................................................... 8
3.3 Competition. ........................................................................................................................................ 8
3.4 Final Recommendation....................................................................................................................... 8
4. Source of Finance................................................................................................................................... 9
4.1 Effect of the selected source on the WACC ..................................................................................... 9
5. Conclusion ............................................................................................................................................. 10
6. References ............................................................................................................................................ 10
7. Appendix ................................................................................................................................................ 11
 1. Introduction
AYR co. is on the brink of stepping up their market share portfolio. The venture have been
called project Aspire and project Wolf respectively and each has its own characteristics. This
report reveals a financial assessment in which we will use numerous procedures to express
which project AYR co should launch. After analysing the basic investment assessment
techniques, we will assess the need for consideration of other factors in the study. When
push comes to shove we will carry out a more thorough review that will allow us to decide
which choice is correct for the customer. Finally, we will analyse finances outlets and
recommend the most relevant for the company when evaluating its effect on the WACC,
prospective creditors and borrowers.
2. Calculation and Equations.
The investment resolution is motivated on deliberations that may communicate to policy
makers and investor’s key goals, which includes determining the long-term worth of short-
term gains. Several methods assessment to company are required for a better analysis
(Pasqual, Padilla and Jadotte, 2013): Net present value (NPV), internal return rate (IRR),
Payback period and discounted payback period.
2.1 Net Present Value (NPV):
As (Pasqual, Padilla and Jadotte, 2013) put it, the Net Present Value (NPV) is "the difference
between the current value of a property and the expense." In other words, the NVP is a
metric used to calculate the shareholders added interest resulting from an investment
decision, thereby taking into account the time value theory of the capital. The NVP formula
simply reflects the current value of potential cash flows, minus the original investment (Hori
and Osano, 2014) Aspects associated to investment will be taken into regard in order to
determine the cash flows that will be measured for the next five years. For these premises,
we will forecast the cash flow projections as seen in Tables 1 and 2 for their respective
services.

Table 1: Project Aspire Projected Cash Flow

 Table 1: Project Wolf Projected Cash Flow
The NPV formula:

(a) (b) (c)

And (Johnsen, 2015) simplified it to formula (b), where formula (c) is discount factor, meaning
(k) the discount rate and (t) the year. A higher NPV will make the project more profitable (Hori
and Osano, 2014) the findings are shown below for both projects using the formula given and
the discount rate of 10 percent.

Table 3: Present Value and NVP for Project Aspire

Table 4: Present Value and NVP for Project Wolf

2.2 Internal Rate of Return (IRR)

As described by (Hori and Osano, 2014) Internal Rate of Return (IRR) is the rate of return
that equalizes the current value of potential cash flows with the original expenditure cost that
is, the discount rate that renders the NVP negative. Typically, the IRR is used as an indicator
of the productivity of the capital investment as a project may be deemed feasible only though
the expense of development is higher than the IRR. It would favourable therefore for
managers to pick the one the higher IRR (Viscione and Neuhauser, 1974).

Formula (d)
However, the above formula cannot correctly applied when calculated manually, and so it’s
best to use a computer system such as Excel to automatically calculate it (Johnsen, 2015).
With Excel we were not only able to measure all IRRs but also to use specific return values to
map the NVP chart 1 and 2 below.
 Chart 1: NPV for Project Aspire

Chart 2: NPV for Project Wolf

2.3 Payback Period

Payback is known to be one of the simplest forms of risk valuation (Viscione and Neuhauser,
1974). It offers the company required time period to produce ample cash flow to balance the
original expense and recover the cost (Pasqual, Padilla and Jadotte, 2013). The longer the
payback time is, the less appealing the fund would be.

Table 5: Payback Period for Projects Aspire and Project Wolf

As observed above in Table 5, all schemes can recover the initial costs for the year 4. The
figures provided in Appendix 1 suggest that the Aspire project would have a payback period
of 3.63 years, whilst the Wolf project would have a payback period of 3.07 years.
 3. Investment projects options
Both ventures, Project Aspire and Project Wolf, were analysed in the previous in section 2
using the most traditional investment appraisal methods. All of them is a non-discounted
strategy Payback Period, which means that it does not recognize the time worth of capital
(Johnsen, 2015). Moreover, while being very quick to quantify, cash flow is not taken into
consideration until the original cost has been restored (Johnsen, 2015). On the other side,
both the NPV and the IRR are subsidized approaches, allowing use of the current value of
the cash that will be earned in the future.
3.1 Recommendation and Evaluations
The overview of the estimates made in the previous portion of this article as seen in figure 8
below.

Table 6: Summary Invested Appraisal

The Project Wolf team has a higher NVP of $379,422, compared to $356,180 for the Project
Aspire team, but the gap is not symbolic, only 6.5 percent better. The IRR metrics also
suggest that both proposals should be approved, as both IRRs are better than the projected
return rate (Hori and Osano, 2014). The project Wolf, though, has an IRR of 16.97%, which is
also higher than the project Aspire estimated (15.31%). Which implies, as seen in Table 7
below, the project Wolf has more probability of achieving the expected rate of return set by
AYR Co., as shown in the Table 7 below.

Chart 3: NPV and IRR for Project Aspire and Project Wolf
In conclusion, looking into the Wolf project payback period is in better position than project
Aspire, because will recover invest faster than in the project Aspire. Regardless of the
approaches that proposing that the project Wolf is better than the project Aspire, financial and
non-financial, should be taken into account.
3.2 Other financial factors to be considered in the decision
To make an optimal capital investment decision we need to realize that every expected future
cash flow is exposed to both, risk and uncertainty. Although uncertainty denotes conditions
that cannot get allocated probabilities, danger applies to events that can arise at a frequency
point that will result in a change in the anticipated return (Watson and Head, 2011). The
project Aspire is less aggressive than the project Wolf, because the goal of the first project is
to expand the existing range of items and to attract both current and future purchasers. At the
other side, the project Wolf seeks to open up a new direction for the business which will
prefer to appeal to a particular form of customer, rendering that a higher cost option (Viscione
and Neuhauser, 1974). In order to address this problem, we will use the Estimated Net
Present Value (ENPV), which is "the average number of potential NPVs weighted by their
chance of occurrence" (Hori and Osano, 2014). In order to quantify this, we can use the
NPVs with a discount rate free of 10 percent and we will apply a discount rate of 15 percent
for the NPV with risk. We will use the corresponding NVP seen in Appendix 3 and 4
respectively. For the project Aspire method, because it is less costly, we will give the risk-free
rate a 75 percent likelihood (P) and the 15 percent rate a 25 percent. Nonetheless, we will
give 50 percent chances to each one for the Wolf project, due to its higher degree of risk. We
will consider the findings in figure 9 below, complete estimates are in the appendix 2.

Table 7: ENVP for Project Aspire and Project Wolf

As seen in the Table 7above, if we accept the risk factor, the project Aspire is more appealing
than the project Wolf. Though, we will measure the Discounted Payback Time and
Productivity Index (PI) for a more thorough study. The (PI), also referred to as the benefit-
cost ratio, lets us assess an expenditure in regards to the interest per unit spent which shows
us the sum of money spent that would earn us return (Pasqual, Padilla and Jadotte, 2013).
Estimates in Appendix 2 indicate that the project Wolf (PI) estimate is better than the project
Aspire estimate (1.51 vs. 1.38). In other words, 51 cents will be gained for every dollar spent
in the project Wolf, while the income will be 38 cents for the project Aspire. Finally, the
Discounted Payback Period is somewhat close to the basic payback period we estimated on
the section 2, but we find the time worth of capital in this situation. (Johnsen, 2015) describe
the current value of a project as the "length of time

Table 8: Discounted Payback Period for Project Aspire and Project Wolf
Table 8 reveals that the DPB duration for the project Aspire is already in the fourth year,
whilst the project Wolf is now in the third year. This assumes that the project Wolf will regain
the initial cost by the third year, whether or not we take into consideration the tame valuation
of capital.
3.3 Non-Financial consideration
Even if financial requirements do point to a definite project, we can also consider non-
financial considerations which have a large subjective dimension and which cannot be
calculated by costs and benefits. (Johnsen, 2015) and (Brunner, 2016) conclude that the
business culture is the most important non-financial factor to be measured. The chosen new
initiative should be aligned with the business philosophy in regards to its purpose and values,
since this is typically one of the key reasons most acquisitions and mergers collapse. We
would also discuss the need to satisfy customer needs in regards to organizational culture,
and the best approach to achieve so is to insure that companies remain dedicated to the
quality of their goods. Both components must be regulated by the leaders of the company
and cannot be expected.
3.3 Competition.
The project Wolf must face a new business climate, where the key players are already
established, by moving the organization in a different direction, becoming a challenge for the
AYR Co. However, the project Aspire faces a different form of danger, linked to this issue: the
impact of cannibalization. According to (Davis, 2006), this phenomenon is associated with a
reduction of five sales of a product due to the introduction of a new line of goods which may
steal market share from the current company. The project Aspire would extend the existing
product range by introducing new products targeted at the same consumer base but will not
automatically contribute to market share benefit. Another important thing to address in future
is the potential to extend (Hori and Osano, 2014) assume that the project Wolf concept
leaves more space for expansion as it opens up a new product range, allowing both the
existing and the current lines to be extended in the future. On the other side the project
Aspire scheme, as an expansion itself, makes it less likely the new growth will arise again
along the same section.
3.4 Final Recommendation
We will base our final decision on the financial and non-financial factors addressed in this
report. The following Table 9 summarizes each item analysed. Investment appraisal
development framework aim to framework project Wolf percentage gap

Table 9: Financial and Non-Financial Summary

Nearly all the metrics show that the project Wolf initiative is the most profitable, with the
exception of the ENVP, which takes into account the difficulty involved with launching a new
line in a new market. However, we also suggest to pursue project Wolf, but even with a
higher discount rate, the team armed with the same lower discount rate would get a better
NVP than the group. We also consider that with the proper study of the current economic
climate, AYR co has more chances of success with the project Wolf than it faces the
possibility of cannibalism with the project Aspire, a danger that has not been taken into
account in the ENVP estimates.
4. Source of Finance
A business that is considering beginning a new project has to evaluate its financing options,
which are typically: capital, stock, and debt. AYR's co. board of directors already agrees that
the company does not have ample capital to choose the original project cost selected. Hence
they would have to choose between raising funds and adding new debts. Equity finance
consists of selling the company's stock in return for new cash, which ensures that a portion of
equity is transferred to the lender, while also transferring the investment burden (Watson and
Head, 2011). A big imaginable issue for this spending plan is that the business will use the
gains to reinvest in a new development project. However, among the drawbacks we should
point out that the estimated return rate should be higher as the burden is shared; there is also
a higher degree of volatility due to venture investors typically exit after five to seven years
(Gombola and Marciukaityte, 2007). Additionally, investors may control the company process
plan and make decisions. The distributions, at least, are not tax exempt. Long-term debt, on
the other hand, consists of borrowing from a lender at a certain interest rate to be repaid over
a specified period of time. In this way ownership, decision taking and risk belong only to the
owner of the company. To cover the loan, cash will be withdrawn from the profits, which
leaves less capital accessible for reinvestment of the business (Gombola and Marciukaityte,
2007). Nevertheless, debt helps the corporation to exclude interest, which is typically smaller
than the rate of return paid on equity, from taxes; however, such fixed loan repayments
require cash flow to be forecast, making the budget cycle simpler (Gombola and
Marciukaityte, 2007). Growing such alternative has a capital cost associated with it.
According to (Johnsen, 2015), the cost of equity, RE, is the appropriate return on the
investment and the formula is: RE = (D1/P0) + g where D1 is the potential shares due for the
next year pay-out, P0 is the current present value of the stock and (g) is the dividend growth
rate. This formula is the most commonly used and is based on the Dividend Growth Model
(DGM), which simply states that shareholders ought to earn higher dividends over time (Nuno
Moutinho and Helena Mouta, 2018). On the other hand, the loan payment, RD is the interest
rate that the borrower charges to the corporation and can be calculated by comparing it to the
actual interest paid in equivalent debts in the financial market. On the other hand, loan
expense, RD is the interest rate that the borrower charges to the client, which can be
calculated by comparing it to the current interest paid on equivalent financial market debts.
Due to lack of knowledge, we cannot quantify any of the capital costs, but, as mentioned
earlier, the debt cost is typically lower than the equity costs. Because of this we consider
using a long-term loan to fund the Wolf mission. We also endorse our recommendation with
the equity gearing ratio below 50 percent, suggesting that the company can continue to have
further debts Appendix 5.
4.1 Effect of the selected source on the WACC.
The weighted average capital cost (WACC) is the calculation of the weighted cost of each
finance source, which is the product of the corresponding capital cost compounded by the
ratio of the overall capital (Hori and Osano, 2014). According to (Pasqual, Padilla and
Jadotte, 2013), the formula is: WACC = (E/V) × RE + (D/V) × RD × (1−TC) where (E) is cash,
(V) is the company's gross stock capital, (D) is debt and (Tc) is the business tax rate. Even if
we do not have debt costs or equity costs, we have adequate knowledge to calculate the
impact of selecting long-term debt as a means of funding on the WACC using the capital
gearing ratio as a guide, which rises to 50%. In fact, the partnership (E/V) will decline due to
the cumulative valuation of the asset value (V). Because of that, AYR's co. board will be
willing to consider the actual effect of the WACC until the capital expense becomes
established. On the other side, because this decision influences the capital gearing level,
which approaches 50 percent, it impacts potential borrowers in a detrimental direction, as
they may stop providing additional loans due to the elevated chance of failure to meet
payments on time, which would result in higher interest rates (Nuno Moutinho and Helena Mouta,
2018). For buyers, the reverse result may occur because they would consider the company's
improved interest and would be more likely to spend in it and get higher dividends.

5. Conclusion
The simple investment assessment methods used have shown that the project Wolf is the
right way to invest. To affirm our decision, we used other methods which proved that this
project would be better than the alternative, the Aspire project, including taking into account
the risk factor. We are now evaluating non-financial considerations prior to final decision.
Then we evaluated the board's two sources of funding and their costs that led us to conclude
that the long-term debt was the right option. Finally, we analysed the effect of the decision on
the WACC, the potential borrowers and lenders to finalize the analysis in the journal.
6. References
Brunner, M., 2016. Sabotage in Capital Budgeting: The Effects of Control and Honesty on
Investment Decisions. SSRN Electronic Journal,
Davis, P., 2006. Measuring the Business Stealing, Cannibalization and Market Expansion
Effects of Entry in the U.S. Motion Picture Exhibition Market. Journal of Industrial
Economics, 54(3), Pp.293-321.
Gombola, M. and Marciukaityte, D., 2007. Managerial Over optimism and the Choice
between Debt and Equity Financing. Journal of Behavioural Finance, 8(4), pp.225-235.
Hori, K. and Osano, H., 2014. Investment timing decisions of managers under endogenous
contracts. Journal of Corporate Finance, 29, pp.607-627.
Johnsen, Å. 2015. Strategic Management Thinking and Practice in the Public Sector: A
Strategic Planning for All Seasons? Financial Accountability & Management, 31(3),
pp.243-268.
Nuno Moutinho and Helena Mouta, 2018. The Importance of Strategic Analysis in Investment
Appraisal. China-USA Business Review, 17(10).
Pasqual, J., Padilla, E. and Jadotte, E., 2013. Technical note: Equivalence of different
profitability criteria with the net present value. International Journal of Production
Economics, 142(1), pp.205-210.
Viscione, J. and Neuhauser, J., 1974. Capital Expenditure Decisions in Moderately Sized
Firms. The Financial Review, 9(1), pp.16-23.
Watson, D. and Head, A., 2011. Corporate Finance. New York, NY: Financial Times/Prentice
Hall.
 7. Appendix

Appendix 1: Calculations Payback Period for Project Aspire and Project Wolf

Appendix 2: Calculations ENPV for both Project Aspire and Project Wolf

Appendix 3: NPV with different rates of return for Project Aspire

Appendix 4: NPV with different rates of return for Project Wolf

Current Capital Gearing = NCL / (Equity + NCL) * 100

= 18 / (20+18) *100
= 18 / 38 *100
= 0.47 *100
 = 47%

Capital Gearing with the Project = NCL / (Equity + NCL) * 100

= 20.25 / (40.25) *100
= 0.50 * 100
= 50%

Appendix 3: Calculations Capital Gearing Ratio AYR Co Project Aspire