• Internal Code :
  • Subject Code : 25742
  • University : University of Technology Sydney
  • Subject Name : Financial Management

Capital Budgeting Technique for Analysis of Investment Decision Making

The investment can be analysed using various method of capital budgeting techniques. Such as calculation of net present value.

Net present value is the difference of the present value of cash inflow and cash outflow. It helps to determine whether the investment made in project shall be deemed as profitable or not. Increase in profitability deems that better decision. Accordingly, the value of investment can be analysed on the basis of expected future cash by discounting at rate of return. Increase in present value of cash inflow rather than increase in present value of cash outflow is better for financial decision.

Accordingly, where NPV of the project is positive, it shall be deemed as better financial decision.

There is need of estimated cash inflow which will be calculated on the basis of the profit of the project. In instant case, there are various expenditure has been incurred for the purpose of this project.

The assumption for analysis of project has been taken as follows:

  • It is assumed that revenue of the project in relation to sale of fish has been determined on the basis of Fisheries and aquaculture production, New South Wales.

  • The purchase of cost of fish is calculated as cost divided by no. of grown out ponds and multiplied by tonne produced.

  • Capital cost of project includes the opportunity cost.

  • Tax @30% has been taken to calculated profit after tax.

  • Rate of required return is taken as 25% for purpose of calculation of present value of cash flow.

On taking above assumption, the present value of cash flow has been calculated and it is observed that present value of cash inflow is more than present value of cash flow and resulted net present value is $ 51,25,552.

Hence, the net present value of project is positive and better to accept such project.

Sensitivity analysis:

It is observed that any increase in production will generate profit as revenue is more than purchase cost and other cost remains same. Hence, It can be concluded that increase in procution will generate more cash flow and leads to positive cash flow and accordingly it will generate more positive NPV. However at the same time where production will decrease there is decrease in cash flow and lead to negative cash flow which is not better for finance:

 

Revenue

Purchase cost

Profit

Silver perch

12,234.69

7,500.00

4,734.69

eels

14,064.52

5,000.00

9,064.52

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