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consider making the forecast such as: • Inflation. • Interest rates. • Production costs like the increase of the paper or ink prices. • Taxes. • Level of demand and customer confidence. • Competition which is the most common factor. The fact that these factors are relevant due to their effects such as: • Balance sheet and the income statement which both can be effected and can have a negative impact upon earning, credit rating, customer confidence and may be lost of capital. After using the EXCEL facilities, linear and non-linear models have been suggested on this project. Two ways to choose the forecast that may fit best. The first way is require the regression facility, which can determine the determination coefficient R2 that indicates the perfect fit when is equal to 1. From the determination coefficient R2 we can see that the largest value which indicating the best fit is the linear model. The other way is usually by comparing the data pattern of the different models. By roughly comparing the models, we can see that the best optimised sales is the one between that the speedily increase in sales (Growth model) after 30 year and the other once which will keep approximately constant sales (Hypo) after the same period and this falls into the linear model . The selected forecast is shown in the following; Year 1 449 Year 2 463 Year 3 477 Year 4 491 Year 5 506 Year 6 520
2-This report has been investigating two different costs. The first one can be calculated from the data given in the projects such as labours, materials and investment costs. These costs have been calculated on the EXCEL sheet. Ehre on the machines sosts were given three different costs. The first cost is the initial costs which include the purchase, transport, set up and commissioning costs. The second is the training cost which will occurs only on the first year. The final cost is the maintenance of the machines which is fixed cost bt it will increase after the first three years. On the maintenance costs, after arranging the nine different cost centres in order, a total period on the four weeks of each cost centre has been summed and analysed. By considering the maintenance costs, we can see that print unit hours is no longer needed. Therefore, much less time needed by the maintenance labours, and this result in reducing the number of labours from four to three.
Payback period = Capital cost / (Annual savings – Annual costs) (Primrose. These saving were simply calculated from the differences between the costs of the exacting machine and the new machine. NPV calculation includes the discount rate. but also the timings of these cash flows. time value of money changes based on the inflation rate. material costs have been calculated due to the decrease of the rework on the new machine (as shown on the EXCEL). Pay Back (Break Even time) This is common used technique due to the simplest to understand and use. the .The other cost that was calculated is the production cost. The calculation is doing Linear Interpolation technique between the years which are shown the change of negative to the positive value at cumulative cash flow after appraisal. Therefore.However. If the NPV is positive. the other costs may not include in the summary measure due the fact that we don’t have enough data or they don’t significantly affect the income. The worth of investment for a project can consider by using NPV technique. Section 3 Appraisal techniques There are many appraisal techniques. Net Present Value (NPV) This is a discounting technique which considers not only the magnitude of cash flows for cost and savings. The increase of the reliability of the new machine will result in a change of the cost in the production labours cost(as shown on the EXCEL). 1991) Another way for calculation is using Linear Interpolation technique which is used in this project. Insurance. consultancy and production lost. In fact. Net Present Value (NPV) and Internal Rate of Return (IRR). this method is not suitable for this appraisal. this technique is simple to use and understand but the calculation shows only the time or period required to recover the initial cost. Basically. This is the disadvantage of this technique. Because of this. This discounts all of the project’s cash flows back to the start time of the project (year 0). Other costs were not calculated but can be achieved by reducing inspection quality or reducing in volume for transport. These costs like Advertising. the exactly payback time is not shown means that payback time is earlier than exactly one. Some saving can be considered on this project as shown on the EXCEL sheet from the various different costs that were discussed above. Last but not least. payback period calculation does not include discount rate. the obviously used techniques are Pay Back Period. It is the calculation of the payback period or break even time required to recover all the initial costs or investment of a project by using the simple formula.
Or if the exponential forecasting was chosen. This is the cons of this technique. When comparing for those techniques. This is the advantage of this technique. Therefore. Internal Rate of Return (IRR) This technique shows the rate of return which will make NPV of the project equal to zero.442.project would be acceptable because the expected return will be higher than the minimum required. NPV will represent the exact value of money in positive or negative calculating after discount rate.60 . the appraisal of this project over this period shows that the derived net present value is given a negative value =-£145. IRR represents the percentage which can use in decision making when comparing projects. the manager can see the exact value of money returning over the period. for the linear forecasting which means over 6 years after discounting the net return money is £145. This value represents in percentage form and is easier for nonfinancial managers to understand when comparing the projects. Section 4 The appraisal model shown the summary measure (Break Even time. In contrast. where some of them are mentioned as following: . if the NPV is negative. However. This can calculate by using the formula of. Section 5 After a period of 6 years. this project will be worth for investment.442. this project is a long term investment that means the company will get greater net return money after 6 years later. NPV represents the exact amount of money with the positive or negative sign to make a decision that project should be preceded or rejected.65 so the manager of PI Printer may not accept this project. if this project is appraised over 10 years. For example. the NPV value will be positive and greater than NPV for 6 years. Net Present Value (NPV) technique is the most suitable in this project. NPV = Cn/(1+r)n where Cn is the total cash flow in year n and r is the discount rate Actually. NPV and IRR) is in shown in EXCEL file. Payback calculation does not include discounting so payback period will be earlier than after discounting. Section 6 There are several different sensitivities in this appraisal. the project would be rejected.
This is because the total cost of overtime is reduced this affects the overtime saving to reduce. over head costs and other costs. For new machine the cost of these can be saved.• Number of contract: if forecast of sales increases that means the expected sales will rise every year. This affects the NPV to decrease. the NPV will decrease. For example. test production copies cost and overtime cost will increase due to the increase of total jobs. such as the varying the price of the new machine. this can decide that the project should not proceed due to worthless investment. Cost of Work: increasing this cost will tend to increase the cost of material. The increase of overtime rate will lead to increase the cost of labor. The company can save more overtime cost with the new machine and the NPV will increase. These mean the overtime saving will also increase so the NPV will increase. NPV may decrease to a negative sign. at cost of work 90% the company can save £196. • Interest rate: if the loan interest rate is varying then the NPV will also vary. Some sensitivities on the machine. where if the new machine cost rises so the total of investment will rise. The cost of rework. the company can save bigger.60 in the same year. if the cost of work is 92% the company can save £201. The NPV will show an opposite side. the NPV will decrease. if the cost of materials raise. • • • • • • . One more sensitive example is the cost of installation or maintenance training where if any one of these increased. this is because when the cost of materials increases this has effect directly on the number of rework and test production copies. Total hours per jobs: if the company increases the total hours per jobs (including machine set up time).00 in year 1. This will results is decreasing of the NPV. the NPV will decrease due to the reduction of money value. Where for example if the interest rate is increases that means the company need to pay more for interest. Because of this the savings in the company will increase and the NPV also increases. the overtime hours will reduce so the NPV will decrease. the overtime hours will increase. Thus.185.812. Discount rate: If the discount rate increase that means the value of money will reduce more for time period. The working days per year in the production: if the company increases normal working days per year.
Downtime rate in total workings hours for print unit cost centre: if this rate increases. the company can save the labor cost saving by 1 worker payment. given expected market returns and the expected risk free rate. Rework rate: if the difference of rework rate between the old machine and new machine is high that means the company can save more rework cost and the NPV will increase. • • • • • • From the sensitivities. The NPV will increase due to the increase of overtime saving. for example. the company will pay less cost. CAD working cost: if the cost for CAD worker decreases. labor cost and overtime. This can be used to establish the risking of return for particular security. they might affect to the appraisal.• The number of manning in print unit: when the company reduces the number of worker. All of those affect obviously to NPV. the NPV will increase due to saving of payment for salaries. if the company reduces 1 worker. if the interest rate is higher. for example. economic factor such as interest rate. the overtime cost will be higher. This can be saving of the company so the NPV will increase. Section 7 The methods of setting the discount rate • Setting from using the Weight Average Cost of Capital which is the overall rate of returned required to satisfy all suppliers f capital. investment. the overtime hours in print unit will increase. Test production copies: if the difference of test copies between the old and new machine is big that means the company can save more material cost and the NPV will increase. These mean the company can save more overtime cost and the NPV will increase. the company will pay more for loan interest and this affects to the NPV. According to the factors in section 1. • Setting from using the Capital Asset Pricing Model which uses the covariance measure. the main risks characteristics to be considered could be forecast. Labor cost per hour: if the company pays higher labor cost. These mean the company can save labor cost for a year so the NPV will increase. . the labor cost for a year will be reduced. Salaries for maintenance labors: if the company reduces the salaries for maintenance labor.
350.• Setting from the rate of inflation. the value of money is lesser over further period. .350. This method is difficult because it requires the estimation of expected inflation rate.00 £77. this method is difficult because it requires the estimation of the inflation rate.com.00 £77. the discount rate can be set from the inflation. Therefore. we want to loan £934500 and use the interest rate of 8.00 which is higher than the appraisal model with interest rate of 7% (£382.00 £77.00 £77. However. For example. the company used the discount rate of 15% and they gained satisfied profit. it is better way to loan the investment from the original bank (loan interest rate = 7%).00) and can affect to the NPV value. In fact.100. the compound interest is used.350. For example.5 % as well as the conditions of loan rate are different in each bank. a huge amount of money is needed to pay so there are some loans from bank for investment.5% instead of 7%.00 £63.700. the discount rate should be set a bit bigger than the expected inflation rate in order to do safely decision making of a project.00 £63.00 £77. Section 8 After contacting a bank of ALBARAKA in Algeria (www.albaraka-bank.). Discount rate = interest rate + risk factor + inflation rate This method could be safely used in decision making a project. total interest Cost of interest rate7% Cost of interest rate 8. if pervious years. This method can be set by.5% £63. To make a decision for a project or appraise a project the manager can remain the discount rate at 15% to generate satisfied profit as before or set to be less or more for comparison with the previous gaining profit.350.100.700.00 £63.00 £77.00 £464. the minimum interest rate that can be given for investment is 8. To invest a project.200. If in this project.00 From the above table.700. as it can be seen by the following.200.00 £63. the interest payment will increase. • Setting from the previous profit of the company.700.700.00 £63.700.00 £382.350. It can be seen that the total of interest is £464.350. • Setting from the interest rate and the inflation rate.
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