Financial Management Evaluation of the Business Proposal†Free Samples

Question: Discuss about the vehicle for Environmental Protection Against carbon Emission for RUNWELL Corporation. Answer: Introduction The present budget report is focused on the evaluation of case study of RUNWELL Corporation in order to assist them in making viable decision regarding their new proposal. For this purpose, various financial tools and industry facts will be considered in the financial evaluation. On the basis of the analysis, the recommendation will be provided to GM of RUNWELL Corporation so they can make a selection of the most beneficial option. Table of cash flows Table of cash flow shows outflow and inflow of cash affected by this project. Initially, RUNWELL Corporation is required to make an investment of $1,570,000. In addition to this, variable cost will be of 45% and fixed cost of $160,000 every year. Employees are required to be trained for training cost, and quality assurance cost is to be incurred. All these expenses are easily recovered through revenues that will be earned through the proposed project and at the end of each financial year there is positive cash flow. Further, at the end of the project i.e. in 8th year, there will be higher cash flow as realisable value of the asset will be recovered. Cash budget of the company shows that GM had considered all possible expenses and revenue to showcase actual position of the project. Positive cash flow at the end of every single financial year clearly shows that proposed project is beneficial financially as it will make improvement in overall credibility and financial position of busine ss. Investment appraisal tools Net present value This is the most viable capital appraisal tool as it considers all crucial aspects of projects like time, inflow and outflow of cash and the present value of money. In accordance with this tool, the project is considered to be favourable if it provides positive value by considering all outflow and inflow of cash. By considering net present value calculation of present proposal, it can be noticed that NPV of the project is $610,636. Discounting for this project is done by considering WACC in order to appropriate consideration of time value of money in cash flows. The project is also beneficial because in initial years there is high flow which increases the overall value of investment in the proposed venture. Internal rate of return This capital appraisal tool computes the interest rate at which NPV is zero i.e. cash inflow is equivalent to the cash outflow. This tool is beneficial for evaluation of attractiveness of project for the purpose of investment. As per this technique, the project is said to be profitable if IRR is higher in comparison to the required rate of return. Computation shows that IRR of proposed venture is 23% which is higher than the cost of capital. It shows that project inflows are sufficient to recover the cost of investment as well as to provide positive returns to the company. Payback Period Payback period is specified as the number of years which are required to pay back initial investment of a capital project through cash flows of the project. Formula = No of years before full recovery of project cost+ Unrecovered cost at the start of year/ Cash flows during full recovery year. The net cash flow is the cash generated through the investment each year. It is also considered as a frequent method of capital budgeting as the same provides management with a rough estimate regarding the decision of acceptability of the project. Hence it is applied in a variety of capital decision for ascertaining appropriate decision. In the present case, according to calculation, it can be observed that a short payback period i.e. 3.8 years thus the project should be accepted by management. Discounted Payback period Discounted payback can be said as that period of time which is required to cover the cost of a project, by including positive discounted cash generated from the profits of the project. The advantage that can be attained by applying the specified method is that the final decision is taken considered after taking into account the time value of money. Formula = Year before discounted payback period occurs + Cumulative cash flow in the year before / Discounted cash flow in the year after recovery. The calculation of discounted payback period is having a minor change in comparison to payback period i.e. the cash flow used in calculations are discounted by the weighted average cost of capital which is used at the interest rate. Discounted payback period occurs when the negative cumulative cash flow converts to positive cash flow; this generally exists in a second and third year. In the present scenario as high positive cash flows exists in initial years and at the same time a lower discounted payback period exists; the project should be accepted by the management. As the existing conditions will allow management to cover investment cost in starting years i.e. in 5.51 years and even possibilities are available for earning higher profits. Industry factors By considering the trends of the industry, it can be noticed that huge efforts are made by automobile manufacturers to make a reduction in carbon emission by making an investment in research and development activities in order to meet environmental standards. However, technologies used for this aspect is continuously changing, but previous technologies are not getting absolutely obsolete. It is because huge technical investment is made to achieve even smaller reductions. Thus, the considered project for 10 years will not be significantly affected by the technological advancement. Although, if in meanwhile duration of the project if there is better technology then GM of RUNWELL Corporation can opt for that by considering cost-benefit analysis of the same. Further, being a part of the automobile industry, RUNWELL Corporation should focus on other factors influencing emissions during the use of the vehicle along with considering environmental aspects. These factors comprise carbon conte nt of fuels, the behaviour of the driver, infrastructure and the age of the car fleet. This has been considered in the proposed project which shows investment is viable financially as well as non-financially. Recommendations By considering the above analysis, GM of RUNWELL Corporation is recommended to accept the proposal for introducing a new line of parts of the vehicle for environmental protection against carbon emission. Investment in this project will provide monetary as well as non-monetary benefits to the company. The investment will provide positive returns to the company as there is positive NPV of $610636 and internal rate of return is comparatively higher than the cost of capital. Furthermore, regulatory authorities are changing regulations to promote technologies in favour of environment and reduction in carbon emission is one of them. In addition to this, customers also consider the fact of carbon emission while making their purchase decision by being conscious about the environment. As a consequence, this project will provide a competitive advantage to the company by generating goodwill and strengthening brand image. With the completion of this project, the company can make an investment in advanced technologies that will ensure environment protection as well as profitability for the business. The concern of GM is viable regarding unexpected growth in car manufacturing technology, but industry analysis clearly indicates that proposed project is in favour of market trends through which company will be able to attain competitive advantage and grab market opportunities for extraordinary profits. Conclusion In accordance with the present study, the conclusion can be drawn that proposed project is in benefit of RUNWELL Corporation as it will make an increase in their operating profits along with providing non-monetary advantages such brand enhancement and competitive advantages in the market. References Books and Journals Garrison, R.H., Noreen, E.W. and Brewer, P.C., 2003. Managerial accounting. New York: McGraw-Hill/Irwin. Haron, N., Yahya, S. and Haron, H., 2014. 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