Project Analysis: Investing Money At The Right Place ✓ Solved

Project Analysis Investing money at the right place is very

Investing money at the right place is very important in order to make more money. A different number of factors should be taken into consideration before investing our valuable money and resources into any project or source. In this paper we will be analyzing and calculating these factors such as Payback Period, Initial Rate of Return (IRR), Modified Internal Rate of Return (MIRR), Net Present Value (NPV) and Profitability index. Later, we will also be performance an exclusive financial analysis for Pristine Urban-Tech Zither Inc.

Payback Period

The Payback Period of a project determines how long it will take for the project to return the initial invested money towards the project (Ross, 2018). In order to calculate the Payback Period of a project, we should know the amount of money that is going to be invested, the amount of money that will be received periodically, and the number of years the project will last. For instance, we will be investing $5,000,000 for Project A and Project B respectively. The cash inflow for Project A will be $1,500,000 from period 1 to period 6, $2,000,000 in period 7, and $0 in period 8. Similarly, Project B’s cash inflow will be $1,250,000 from period 1 to period 7, and $1,600,000 in period 8. By calculating the payback period, we determine that we get back our initial invested amount from Project A in approximately 3.33 years and from Project B in 4 years. A shorter payback period is preferable, thus we would opt for Project A over Project B.

Initial Rate of Return (IRR)

In calculating the Initial Rate of Return (IRR), we establish the interest rate at which the Net Present Value (NPV) is 0 (Ross, 2018). IRR is considered to be the return on the discounted rate; if it is greater than the initial rate, the project is deemed profitable. Given the initial invested amount and the cash inflows for both projects, with an initial rate of return set at 15%, we can calculate IRR. Setting NPV value to 0 allows us to derive R as the return on the discounted rate. Through this calculation, we find IRR for Project A to be 23.80% and for Project B to be 19.19%. Since a greater IRR suggests larger profitability, Project A is therefore the more feasible choice for investment.

Modified Internal Rate of Return (MIRR)

To determine the economic sustainability of mutually exclusive projects, we modify the initially calculated Internal Rate of Return (Ross, 2018). Similar to IRR, if the MIRR exceeds the initial rate of return, the project is viewed as profitable. Using the relevant formula, we ascertain the value of MIRR for Project A at 19.20% and for Project B at 16.97%. Given that a higher percentage indicates improved profitability, Project A stands out as the more financially sound option.

Net Present Value (NPV)

Net Present Value is essentially the current value of money in relation to its future worth (Ross, 2018). The NPV is calculated to assess future monetary values against today’s value, helping investors gauge the potential gains from a project following its completion. The formula used is: NPV = PV - FV/(1+i)^t, where PV is Present Value, FV is Future Value, i is the discounted rate, and t is the number of years. For both projects, we calculate NPV and come to a conclusion of $6,428,954 for Project A and $5,723,654 for Project B. Once again, Project A asserts itself as the profitable choice due to its greater NPV.

Profitability Index (PI)

The Profitability Index (PI) is determined by dividing the present cash value of future cash flows by the amount invested (Ross, 2018). Should the Profitability Index exceed one, the project is categorized as profit-generating. For our calculations, we derive PI values of 1.28 for Project A and 1.14 for Project B. Given that both reflect values above one, we again prefer Project A based on its superior PI.

Conclusion

Taking all factors into account, Project A is more profitable than Project B, rendering it the preferable option for investment. In analyzing Pristine Urban-Tech Zither Inc., we find that Zither is a rapidly developing company that previously invested in land for managing toxic waste three years ago. They are now considering selling the property for $2.3 million post-tax, or potentially earning $2.4 million if the sale occurs after 4 years. As consultants to Zither, it's important to assess various financial factors as revealed by the marketing team’s report.

Initial Cash Flows and Sunk Costs

The marketing report indicates significant initial investments towards Zither's project, including working capital of $125,000 and a total expenditure of $350,000 for scrapping equipment. The collective initial cash flows amount to $475,000. A critical aspect of this analysis is recognizing sunk costs, which, in this instance, amount to $125,000, representing payments for marketing reports that cannot be recovered. Sunk costs should not influence future cash flow decisions.

Annual Operating Cashflows

Annual operating cash flows are calculated at the end of each year by summing up Net Income, Depreciation, and Working Capital Changes. The expected Net Income is $442,339, $477,710, $1,476,623, and $1,340,378 for years 1 to 4, leading to a total of $3,737,050. The accumulated Depreciation over these four years amounts to $3,150,000, and only a $125,000 change in working capital occurs in year 4. Consequently, our annual operating cash flows total $6,887,050.

Terminal Cash Flows, NPV, and IRR

Terminal cash flows are calculated by aggregating the after-tax salvage value with annual operating cash flows. For our cash flow values over the four years, we compute $1,423,796, $1,592,497, $1,382,616, and $1,057,808, leading to an overall summation of $5,456,717. With a rate of return of 13%, we can calculate the NPV as $1,831,717—exceeding the total investment amount, thus indicating a potentially lucrative investment opportunity. The resultant IRR is calculated as 35.22%, significant than the assumed rate of 7.71%, affirming the project’s viability.

Impact on Market Price

As Zither is publicly traded, we can anticipate a positive impact on its market standing. The calculations performed show the project’s potential profitability, attracting more investors and driving stock growth. Therefore, it’s justified to state that the project will favorably influence Zither's market price.

References

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