Introduction

Companies are required to perform financial analyses to identify their liquidity, performance

stability, and future performance. Similarly, companies by estimating the financial performance

and analysis could identify their key strengths, weaknesses, opportunities, and threats while

simultaneously working on the deficit factors to maximize the growth and profit. Trump De

Tomato Company is a company specialized in the farming of aquatic organisms that operate a

new farm in sandy bay. The project involves the price of 1,000,000 dollars. Subjected to the

depreciation for tax purpose and accounting companies are expected to use for up to 5 years and

scap it with zero value. The equipment will require 5000 maintenance costs. Similarly, the

renovation includes the cost of 200,000 assuming there won't be a tax deduction of capital.

Discuss which cost is relevant for the evaluation of the project and which is not relevant

The project involves the cost which is relevant and which is not relevant. Out of the total cost

given, the cost that is relevant for the evaluation of the project is following:

- Capital Expenditure: the capital expenditure is relevant for the evaluation of the project

as it involves huge investment associated with the project. The capital expenditure

involves the initial investment for the purchase of land which is worth 1,000,000 dollars.

- Working capital: Working capital involves the cost associated with covering the daily

expenses of the company. The working capital involves the daily cost such as material

costs which lasts over the period of 5 years.

- Operating Expenses: The operating expenses are also the cost that needs to be included in

the project. It includes the cost associated with the project and involves the cash relevant

for the increment of cash flow after tax. The additional cost that is expected to include in

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 the project is annual labor cost, maintenance cost, operating fixed cost, tax expenses, and

costs.

Non Cash Expenses

While evaluating the project such expenses are not included in the project. Non-cash

expenses such as depreciation are not included in the evaluation of the net present value of

the project. Depreciation is the investment expenditure and is not included in capital

expenditure.

Calculation of Initial Investment Cash Flow

Initial investment cash flow refers to the cash invested by the company before the beginning

of the project. Such cash involves big capital expenditures such as the purchase of

equipment, machinery, and other projects that involve huge cash outflow. The initial

investment outlay of Trump de Tomato Company involves following expenses

Expenses associated with the purchase of land worth 1,000,000.

Purchase of Equipment worth 1,000,000

Renovation of warehouse costing 200,000

Calculation of Operating Cashflows

The operating cash flow of the trump de tomato company involves the cash associated with

the project that is equal to net operating profit after tax added with amortization and

depreciation. It is calculated by using the following formula:

Estimated operating cashflow = Earning before tax and depreciation – Depreciation *(1-tax

rate) + D& A

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 Year Cashflow from operating activities

1 $300,100

2 $405,940

3 $557,890

4 629292

5 625717

4. Calculation of the Payback period assuming the project is sold after 5 years.

The net cash flow of the project at the initial stage is $2,200,000. After recovering the cash

inflow of 300,100 in the first year, 405,940 in the second year, 557,898 in the third year, and

629,292 in 3rd year the company sold the project to recover the cash. So, overall the company is

required the time 4.19 years for the cash flow to recover the investment without selling the

project at 5 years.

5. Calculation of Net present value: Initial Investment sold for 1 million after 5 years.

- The cost of the project at the initial stage is 2,200,00. The calculation of the weighted average

cost of capital shows that the WACC of the project is 10.65%. So, when Net cash flow is applied

and the cost of capital is considered, the net present value becomes $214,371.98

The project having positive net present value generates the cash that exceeds the cost associated

with the initial investment. Therefore, the project is good in terms of investment as it generates a

net present value that is positive.

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Calculation of Internal Rate of Return.

The internal rate of return refers to the rate at which the cash flow becomes zero. The calculation

of the internal rate of return using the weighted average cost of capital shows that IRR is

13.55%. Higher the internal rate of return than the cost of capital, beneficial the project becomes.

Therefore, the project is positive for the investment and generates positive cash flow.

Recalculation of Net present value using sensitivity analysis

Scenario 1: Decrease in project sales by 10% annually

If there is a decrease in project sales by 10% annually, the net present value of the project will

fall by -74,124. The negative figure of the project clearly shows that the project is not profitable.

The reduction of sales leads to a decrease in total production and reduction of production

quantity that ultimately impacts the variable cost and material cost.

Increase in Sales by 5% annually

If trump de tomato increases its sales by 5% annually, it will have a positive effect on sales price

as it doubles the result of the company compared to the original NPV that considers the increase

in revenue.

Increase of Material Costs Changes from 3.5% to 8%

In the scenario, when the material cost of the company increases from 3.5% to 8% leads to an

increase in the net present value of the company. Though the net present value of the company is

lower than the original, it is advisable for the company to accept the project as the revenue

generated is greater than the initial investment outlay.

Impact of Covid 19 and change in the outcome of the project

The covid 19 pandemics have resulted in disastrous volatility across the industries causing the

investors to prefer risk-free assets over the company stocks. Assuming the industry has the

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impact of covid that resulted in difficulty of seafood trade, the cost of equity involves 14.80%

which is calculated by adding 1 percent of CVRP. The WACC involves increasing the value to

11.25%.

Recommendation

The project generates positive net present value and internal rate of return which shows that

management generates profit if it accepts the project. Furthermore, the project involves support

through the identification of the company’s amount and acceptance. However, the shorter the

payback period, profitable the project. Therefore, it is advisable for the company to eliminate

weaknesses and accept the project.

Conclusion

It is advisable for trump de temp