• Internal Code :
  • Subject Code :
  • University : Asia Pacific International College
  • Subject Name : Project Economics & Finance

Financial Analysis

Contents

Introduction.

Information about the financial project.

The assumption made for financial analysis of the project.

The risk associated with financial project.

Financial appraisal of both project.

Financial analysis.

Sensitivity analysis of the financial proposal

Non-financial Factor.

Selecting the best alternative and Recommendation.

Conclusion.

References.

1. Introduction

Business environment id very tough to survive for a business organization as there is a various competitor of the organization. For the survival of the business, it is required for the company to collect the strategic and financial information for decision-making purposes toward the business. In this report, AstraZeneca PLC (AZN) has been select for project analysis of the available project of the company. This company operates in the drug manufacturing industry and belongs to the health care sector. The top management of the company wants to evaluate the financial project available with the company for investing to create financial gain for the business.

2. Information About the Financial Project

AstraZeneca PLC (AZN) is the pharmaceutical company and having the financial project to extend the line of business to increase the market share of the company and provide a better service to the consumer. Top management is having the two financial project which requires the initial financial outcome of money and in consideration, these project will provide the annual inflow. Management wants to evaluate the project to choose the best alternative from them. Both the project require different outflow and provide different inflow to the company. The company wants to make the best project as it will help them to increase the value of the company.

3. The Assumption Made for Financial Analysis of The Project

To evaluate the financial project of the company, it is required to assume the financial information which requires the calculation of the financial appraisal. This information will cover the life of the financial project, residual value, initial outflow of the company, and annual inflow required (Baucells, and Bodily, 2018). The cost of the capital of the project has been assumed to be 10 % for the analysis purpose. Details information has been provided below:-

Following financial details has been assumed

Details

Project 1

Project 2

Initial outflow

£ 45,000.00

£ 55,000.00

Annual Cash Inflow

£ 7,600.00

£ 9,500.00

Residual value

£ 4,500.00

£ 2,400.00

Life of the project

10 years

10 Years

The required rate of return

10%

10%

Source: - (Please refer to the excel sheet for details)

From the above details, it can be observed that the initial outflow of project 1 is £ 45,000.00 while the other project required £ 55,000.00. Both financial projects require different initial outflow and having different annual inflow.

4. The Risk Associated with Financial Project

A financial project of the company that is available to analyze has the risk associate with them. As both the project is related to the future activity of business and future can be predicted by the top management with the strategic financial information but still, it can't say that there will be no uncertainty. The market is volatile to its macro and microeconomic factors. These Factors influence the governmental policy, technology, political stability, and can't be predicted accurately to consider at the present scenario. Hence it will always associate the above mansion risk (Deng. Zhang, Lu, and Li, 2020).

5. Financial Appraisal of Both Project

Every Financial project requires to be analysis to evaluate its future viability to consider the safer side of the initial outflow of the company. For this purpose, it is required to evaluate the project with the use of the financial appraisal technique. A most useful method of financial appraisal is the NPV method and consider to be more reliable than any other technique of financial appraisal. In this method, the present values of all the annual inflow will be considered and calculate the NPV of the project if it is positive then the project is viable. Following are the NPV calculation provide here:-

Project 1

NPV calculation of the Project 1

Year

outflow

Annual Inflow

Net Cash Flow

PV @ 10 %

present values

0

 £ 45,000.00

 £ -

-£ 45,000.00

 £ 1.00

-£ 45,000.00

1

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.91

 £ 6,909.09

2

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.83

 £ 6,280.99

3

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.75

 £ 5,709.99

4

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.68

 £ 5,190.90

5

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.62

 £ 4,719.00

6

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.56

 £ 4,290.00

7

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.51

 £ 3,900.00

8

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.47

 £ 3,545.46

9

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.42

 £ 3,223.14

10

 £ -

 £ 7,600.00

 £ 7,600.00

 £ 0.39

 £ 2,930.13

10

 £ -

 £ 4,500.00

 £ 4,500.00

 £ 0.39

 £ 1,734.94

Net Present Value (NPV)

 £ 3,433.65

Source: - (Please refer to the excel sheet for details)

Project 2

NPV calculation of the Project 2

Year

Initial outflow required

Inflow each year

Net Flow

PV factor@ 10%

Present Value

0

 £ 55,000.00

 £ -

-£ 55,000.00

 £ 1.00

-£ 55,000.00

1

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.91

 £ 8,636.36

2

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.83

 £ 7,851.24

3

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.75

 £ 7,137.49

4

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.68

 £ 6,488.63

5

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.62

 £ 5,898.75

6

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.56

 £ 5,362.50

7

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.51

 £ 4,875.00

8

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.47

 £ 4,431.82

9

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.42

 £ 4,028.93

10

 £ -

 £ 9,500.00

 £ 9,500.00

 £ 0.39

 £ 3,662.66

10

 £ -

 £ 2,400.00

 £ 2,400.00

 £ 0.39

 £ 925.30

Net Present value

 £ 4,298.69

Source: - (Please refer to the excel sheet for details)

6. Financial Analysis

From the NPV calculation of both the financial project, it can be analyzed that project 1 is having an NPV of £ 3,433.65 while Project 2 is having an NPV of £ 4,298.69. It can be seen that Project 2 is having higher NPV as compare to Project 1. The company should invest in project 2 to create a high value for the company. As this project has different initial outflow and inflow hence it is also required to evaluate the profitability index of both projects. Following are the calculation: (Benamraoui, et al. 2017)

Particular

Formula

Project A

Project B

Profitability Index

PV of Initial Inflow

PV of Initial outflow

0.08

0.08

Source: - (Please refer to the excel sheet for details)

From the PI analyzed of the financial project it can be seen that both the project is having the same PI and can we suggest investing in any of the projects to create the value (Borne, et al. 2018).

7. Sensitivity Analysis of The Financial Proposal

Sensitivity analysis is required to consider because it can provide the evaluation with consideration of the uncertainty of the project in the future period as affected by the market volatility. Following are the sensitivity evaluation:-

Sensitivity test of Project 2

Particular

Existing position

If inflation increase by 2%

If inflation decrease by 2%

NPV

3433.65

 £ 4,959.53

 £ 3,624.19

Change in %

 

0.44

-0.39

Source: - (Please refer to the excel sheet for details)

If the Inflation will reduce then NPV will be lower by 39 % and if the Inflation rate will high then NPV will be 44% higher than expected. This should be considered while investing n the financial project 2 to create the value (Baucells, and Bodily, 2018).

8. Non-Financial Factor

Every financial opportunity has the financial and nonfinancial factors to be considered in the valuation of the project to consider the success of the financial project. It should also be considered because of the huge investment of the company is going to involved in the project. This non-financial information includes the organization's operating style, skilled and technical employee, acceptance of the new work style in the organization, and change in the process. This will lead to a result in success and the unsuccessful result of the financial project which also needs to be considered (Benamraoui, et al.2017).

9. Selecting the Best Alternative and Recommendation

After analyzing both the financial project from the economically and noneconomic, it can be said that project 2 is providing the best alternative from both the project and can be helpful to improve the value of the company at large scale. It is recommended for the company to accept the project 2. It will also be beneficial for the company if the top management of the company procures the other strategic financial information for the future viability of the company to evaluate more efficiently (Shinzato, 2018).

10. Conclusion

From the above observation of the financial appraisal of the above financial project, it can be seen that project 2 is having higher NPV and beneficial for the company. The financial appraisal technique provides the best outcome of the analysis of future business activity. Top management should also consider the sensitivity of the project by considering the market trend or uncertainty of the project that can occur and can't be controlled by the company. But this prediction help to prepare the policy and standard which require to be followed by the company to reduce the adverse impact of future uncertainty.

References

Baucells, M., and Bodily, S. E. (2018). Net Present Value Analysis of Projects Under Expected Utility.

Baucells, M., and Bodily, S. E. (2018). Net Present Value Analysis of Projects Under Expected Utility.

Benamraoui, A., Jory, S. R., Boojihawon, D. R., and Madichie, N. O. (2017). Net Present Value Analysis and the Wealth Creation Process: A Case Illustration. The Accounting Educators' Journal, 26.

Benamraoui, A., Jory, S. R., Boojihawon, D. R., and Madichie, N. O. (2017). Net Present Value Analysis and the Wealth Creation Process: A Case Illustration. The Accounting Educators' Journal, 26.

Borne, O., Petit, M., and Perez, Y. (2018, June). Net-Present-Value Analysis for Bidirectional EV Chargers Providing Frequency Containment Reserve. In 2018 15th International Conference on the European Energy Market (EEM) (pp. 1-6). IEEE.

Deng, C., Zhang, S., Lu, Y., and Li, Q. (2020). Determining the ecological compensation standard based on forest multifunction evaluation and financial net present value analysis: a case study in southwestern guangxi, china. Journal of Sustainable Forestry, 1-20.

Shinzato, T. (2018). Replica Analysis for Maximization of Net Present Value. arXiv preprint arXiv:1810.06366.

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