Running Head: PROJECT EVALUATION 1

Project Evaluation: A Case of Bebida Sol

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University Affiliation

Date of Submission
PROJECT EVALUATION 2

Question 1. Evaluating the relevant cash flows

Relevant cash flows are considered to occur in the future either as inflows or outflows

and are incremental in nature. Therefore, only revenues and cost are included as they give

rise to cash flow. Some of the expenses such as depreciation are usually excluded in the

computation since no expenses is charged. The importance of identifying relevant cashflow is

they enable in investment appraisal to be able to accept or reject the project (Vajpayee &

Sarder, 2019).

The following have been considered to be relevant cashflows as they yield from the

change implementation of the project as provided in the case study.

  Amount
Annual revenue 36000000
Labour 2160000
Direct materials 12960000
Energy 600000
Administration 300000
Accounting 360000
Loss of revenue 800000

If the proposal was to be rejected, the revenue will not be generated, costs will not be

incurred and the firm will not lose the 800,000 pesos that is poised to lose annually from the

sale of new product.

Question 2: Evaluation of the project given the investment rules.

Evaluation of a project is done based on different investment rules that rise form the

capital budgeting methods applied (Farrar, 2020). These rules help a project manager

determine whether the project is to be accepted or rejected. Some of the methods that are

used include payback period, Net present value, project index and internal rate of return.
PROJECT EVALUATION 3

Payback period determines the period at which the project will have recovered the invested

capital. If the period exceeds the set minimum period the project is rejected.

Net present value applies the time value of money given a certain discounted rate. If

the project has a positive net present value it is accepted and if negative it is rejected.

Profitability index examines the number of times the project revenue is in respect to the

invested capital. If the ratio is less than one the project is rejected, and if greater it is

accepted.

Year 1   1 2 3 4 5
Installation -
costs 50000000          
Annual
production   7200000 7200000 7200000 7200000 7200000
Price per ltr   5 5 5 5 5
Total
revenue   36000000 36000000 36000000 36000000 36000000
Per Ltr   1.8 1.8 1.8 1.8 1.8
Direct
materials   12960000 12960000 12960000 12960000 12960000
Labour   2160000 2160000 2160000 2160000 2160000
Contributio
n margin   20880000 20880000 20880000 20880000 20880000
Less
overheads            
Energy   600000 600000 600000 600000 600000
Administrat
ion   300000 300000 300000 300000 300000
Accounting   360000 360000 360000 360000 360000
Deprecation   9200000 9200000 9200000 9200000 9200000
             
Surplus   10420000 10420000 10420000 10420000 10420000
Tax   30% 30% 30% 30% 30%
After-tax   7294000 7294000 7294000 7294000 7294000
Add back
depreciation   16494000 16494000 16494000 16494000 16494000
Loss on
sales of
other
products   800000 800000 800000 800000 800000
Sales for
the product   15694000 15694000 15694000 15694000 19694000
Discounted   18.20% 18.20% 18.20% 18.20% 18.20%
PROJECT EVALUATION 4

factor
Annual 50590008 13277495 11233075 9503448. 8040142. 8535845.
cashflow .09 .77 .95 348 426 601
590008.0
NPV 933          

From the computation of the project, the project generated a Net present value of

590,008.1 pesos. It took the project 4.93 years to recover the invested capital while the

profitability index was at 1.0118 times. Therefore, the project should be undertaken.

Question 3: Benefits and Risks of Undertaking the Project

In undertaking the project, the firm will increase its revenue at a reduced cost since it

will apply the available labour. Likewise, the project will be providing a solution to society

thus reducing the level of obesity and overweight individuals. If the market has fewer range

of such drinks it will be to the advantage of the firm as by increasing the range, there will be

close substitutes of the products that it is already providing. The project will increase revenue

inflows to the firm.

The disadvantage of investing on the project, it has a weighted cost of capital that may

prove the project to be unprofitable if sales are to be affected in any given year. Additionally,

if the population lacks awareness on the obesity and overweight knowledge the product may

experience difficulty in penetrating the market. Therefore, the firm should focus on

improving the awareness as their advertising strategy to penetrate the market.

PROJECT EVALUATION 5

References

Vajpayee, S. K., & Sarder, M. D. (2019). Fundamentals of Economics for Applied

EngineeringSecond Edition. CRC Press. https://doi.org/10.1201/9780429199455-3

Farrar, S. (2020). Tax and Optimal Capital Budgeting Decisions. Routledge,

https://doi.org/10.1201/9780429435812-3