Professional Documents
Culture Documents
Name of student
Institutional affiliation
Date
2
Task 1
Internal memo
From: Roberts
NPV refers to the value of all future cash flows (negative and positive) over the entire life of the
investment. The NPV is used to compare the rate of return of different projects (Magni &
Marchioni, 2020). If the NPV is positive, it is profitable. If the NPV is negative, it is not.
However, NPV isn't useful when trying to decide which projects to take on as size or timeline
aren't considered. The NPV uses the time value for money. A negative NPV indicates the
expected rate of return will be lower implying the no value will be created by the project.
The two projects had a positive NPV. However, a project with a greater NPV should be selected
(Magni & Marchioni, 2020). Based on the above calculations, Djakarta Plant has a greater NPV
of $25978.66 compared to Gladstone Plant with an NPV of $15525.30. The IRR of Djakarta of
49% is higher than Gladstone at 48%. Therefore, the BrizChem management should select
Djakarta Plant (Peymankar & Ranjbar, 2021). A higher IRR shows the return is higher than the
required rate of return (WACC) of the company and therefore a project with a higher IRR should
be rejected. Though the net present value method is more flexible, it isn't useful when trying to
compare projects of different sizes or analyze a project's return timeline
3
Task 2
You are a newly hired financial analyst with Cascade Water Company (GCWC), a
company operating in most states of Australia, which specializes in bottling purified water
sourced from Blue Mountains springs. CWC is considering adding to its product mix a
'healthy' bottled water geared towards children, aimed at improving both its business focus
and the return to shareholders.
Particular Amou
s nt
PV 91.7
Time 14
FV 100
Coupon 8
YTM 9%
Particulars Amount
PV 91.7
Time 14
FV 100
Coupon 8
YTM 9%
Cost of
equity 7.375%
Valuation of
WACC
4
66500000
Value of equity 0
25217500
Value of debt 0
Cost of equity 7.375%
Cost of debt 9%
Tax rate 32%
WACC 7.0431%
Normal case
Year 0 Year 1 Year 2 Year 3 Year 4
Particulars 0 1 2 3 4
Initial Investment 5000000
Cash Flows 2687500 2741250 2796075 2851996.5
less: Variable cost 675000 688500 702270 716315.4
Fixed cost 50000 50000 50000 50000
-
Cash inflows 5000000 1962500 2002750 2043805 2085681.1
PVF @7.0431 1 0.934203422 0.872736 0.815313 0.761668183
- 1747872.
PV of cash flows 5000000 1833374.215 1 1666341 1588596.934
NPV 1836184
Calculation of NPV of CWC's project using excel: Since the NPV is positive, the project is
considered as a good investment.
With the data of Hydro Vital, NPV of the comparable company is calculated using excel:
Since the NPV is negative, so it is not a worthy option to enter into this investment
Equity
Cost of
Debt 7.75%
D/E 0.35
Tax rate 36%
22.4000
WACC %
Year 0 Year 1 Year 2 Year 3 Year 4
Particulars 0 1 2 3 4
Initial 500000
Investment 0
268750 274125 279607 285199
Cash Flows 0 0 5 7
less:
Variable 716315
cost 675000 688500 702270 .4
Fixed cost 50000 50000 50000 50000
-
Cash 500000 196250 200275 204380 208568
inflows 0 0 0 5 1
0.7352 0.5406 0.3975 0.2923
PV factor 1 94 57 42 1
-
PV of cash 500000 144301 108280 812498 609666
flows 0 5 2 .8 .4
-
105201
NPV 8
7
NPV of Life Water using excel: Since the NPV is negative, so it is not a worthy option to enter
into this investment.
Worst case
Year 0 Year 1 Year 2 Year 3 Year 4
Particulars 0 1 2 3 4
Initial
Investment 5000000
Cash Flows 1803750 1839825 1876622 1914153.93
less: Variable
cost 1175000 1198500 1222470 1246919.4
Fixed cost 50000 50000 50000 50000
- 604151.
Cash inflows 5000000 578750 591325 5 617234.53
0.93420342 0.81531 0.76166818
PVF @7.0431 1 2 0.872736 3 3
PV of cash - 540670.230 516070.6 492572. 470127.903
flows 5000000 3 3 6 2
-
NPV 2980559
Best case
Year 0 Year 1 Year 2 Year 3 Year 4
Particulars 0 1 2 3 4
Initial 500000
Investment 0
Cash Flows 3262500 3327750 339430 3462191.1
8
5
less: Variable
cost 450000 459000 468180 477543.6
Fixed cost 50000 50000 50000 50000
-
500000 287612
Cash inflows 0 2762500 2818750 5 2934647.5
0.9342034 0.81531 0.7616681
PVF @7.0431 1 22 0.872736 3 83
-
PV of cash 500000 2580736.9 2460024. 234494 2235227.6
flows 0 52 7 2 3
462093
NPV 1
Recommendations
CWC should invest in this project. Based on the line graph shown below, the worst-case scenario
is highly sensitive because its far away from the normal case scenario, in comparison to the best-
case scenario. The best-case scenario is nearer the normal case hence less sensitive. Therefore,
the CWC should select to invest the project because the best-case scenario has a positive NPV
and its less sensitive to changes in price per unit.
9
Sensitivity analysis
4000000
3000000
2000000
1000000
0
Year 0 Year 1 Year 2 Year 3 Year 4
-1000000
-2000000
-3000000
-4000000
-5000000
-6000000
Calculation of NPV of CWC's project using excel: Since the NPV is positive, the project is
considered as a good investment.
With the data of Hydro Vital, NPV of the comparable company is calculated using excel:
Since the NPV is negative, so it is not a worthy option to enter into this investment
NPV of Life Water using excel: Since the NPV is negative, so it is not a worthy option to enter
into this investment.
Calculation of NPV of Best-case scenario using excel: Since the NPV is positive, the project is
considered as a good investment. The firm should invest in the project.
Calculation of NPV in Worst case scenario using excel: Since the NPV is negative, the project
is considered as not a good investment. The firm should reject the project at worst case scenario.
10
References
Peymankar, M., Davari, M., & Ranjbar, M. (2021). Maximizing the expected net present value in
a project with uncertain cash flows. European Journal of Operational
Research, 294(2), 442-452.
Pertiwi, I. G. A. I. M., Suasira, I. W., Kristinayanti, W. S., Setyono, E. Y., & Andayani, K. W.
(2018, May). Cash flow optimal analysis on NPV risk based on break event point of
various types of housing in housing development projects. In Proceedings (Vol. 1,
No. 1, pp. 184-193).
Magni, C. A., & Marchioni, A. (2020). Average rates of return, working capital, and NPV-
consistency in project appraisal: A sensitivity analysis approach. International
Journal of Production Economics, 229, 107769.
Marchioni, A., & Magni, C. A. (2018). Investment decisions and sensitivity analysis: NPV-
consistency of rates of return. European Journal of Operational Research, 268(1),
361-372.