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Financial Apprasial

Contents

Introduction.

Information about the case project

Assumptions made for modeling and analysis.

Risks involved in the case project

Financial appraisal of both project

Financial Analysis of Case Project

Sensitivity Analysis.

Other non-financial decision-making factors.

Selection of best alternative.

Recommendation.

Conclusion.

Introduction

To grow in the dynamic business environment it is required to assess the market and bring the change into the business organization to face the changes that are happening in the market such as inflation, changing interest rates, demand,supply, and cost of production. This is the part of micro and macro-economic changes that can occur in the market and provide an adverse impact on the organization. In this report, the Unilever Group (UL) has been select to analyze the investment opportunity to do the financial and economic analysis and recommended the best option to choose for a value increasing purpose. This report will also contain the analysis of nonfinancial decision-making factor which can influence the investment decision and the stativity analyses of the viability of the project. This will help to understand the financial outcome of the project in the future years of the company (De Weerdt, et al. 2013).

1. Information About the Case Project

Unilever Group (UL) is operating in the industry of fast-moving consumer goods (FMCG) and have a lot of product to produce in verity of the product to supply worldwide. Hence, they require a plant to produce the product which can help them to manufacture the skin cleansing product at a high quantity at a fast rate and also help them to reduce the coat of the product. They are planning to install the machine and having two alternative option which is Machine 1 and Machine 2. Both machines can produce the product at a high quantity with a reduction in the cost. But both the project is having a different financial outcome in terms of money. Both the project are having different initial outflow and salvage value and require to be an analysis of the economic impact of the project. (Helfert, 2012).

2. Assumptions Made for Modeling and Analysis

For the financial analysis of the two projects and providing the conclusion, it is required to assume the financial information of the available project. This information includes the initial outflow, annual inflow, salvage value at the end of the life, life of the project, and cost of capital of the project so that financial analysis of the two projects can be done in at appropriate manner. Following are the details that have been assumed for the analysis purpose of the project:-

Following Details has been assumed

Particular

Machine A

Machine B

Initial outflow required

£ 30,000.00

£ 35,000.00

Inflow each year

£ 6,500.00

£ 6,900.00

Salvage value

£ 2,500.00

£ 2,300.00

Life

10 Years

10 Years

Required cost of capital

11%

11%

From it can be seen that machine A requires the £ 30000 of outflow while machine B requires the outflow of £ 35000 while both the project is having a life of 10 years with the cost of capital 11 %. Annual inflow of both projects is different which requires to be analyzed through the financial appraisal technique (Edmister,2012).

3. Risks Involved in The Case Project

Both the machine is efficient to produce the product at a lower price from the existing project but it is required to the analysis of the financial viability of the project because every financial project involves the risk and this need to be evaluated from the organization respective that, how much risk organization can bear within the current situation. The risk which is involved in both the project is future uncertainty that may occur and destroy the financial outcome of the present scenario (Horrigan, 2018). The market volatility of the project can arise as the inflation rate, higher interest rate, low demand for product produce, or any other financial crises. Future can only be predicted but it can't be a guarantee that all the happening will be as per the plan hence it will always provide the risk factor to both the project and top management of the company require to consider this future risk factor of the projects in their analysis before taking any decision.

4. Financial Appraisal of Both Project

To evaluate the financial viability of the project, it is required to utilize the financial appraisal technique. This technique will help to analyze the actual value of the project and provide the financial information of the project to take wise decisions. Net present value methods are the most reliable method to analyze the financial project as it considers the present value of the annual inflow of the company and requires the present value factor which makes it more reliable (Johnsen, andMelicher, 2014). Following are the NPV analysis of project A and B:-

Project A

Calculation of net present value of the Machine A

Year

Initial outflow required

Inflow each year

Net Flow

PV factor@ 11%

Present Value

0

 £ 30,000.00

 £ -

-£ 30,000.00

£ 1.00

-£ 30,000.00

1

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.90

 £ 5,855.86

2

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.81

 £ 5,275.55

3

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.73

 £ 4,752.74

4

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.66

 £ 4,281.75

5

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.59

 £ 3,857.43

6

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.53

 £ 3,475.17

7

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.48

 £ 3,130.78

8

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.43

 £ 2,820.52

9

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.39

 £ 2,541.01

10

 £ -

 £ 6,500.00

 £ 6,500.00

£ 0.35

 £ 2,289.20

10

 £ -

 £ 2,500.00

 £ 2,500.00

£ 0.35

 £ 880.46

Net Present Value (NPV)

 £ 9,160.47

Source: - (Please refer to the spreadsheet for detail calculation)

Project B

Calculation of net present value of the Machine B

Year

Initial outflow required

Inflow each year

Net Flow

PV factor@ 11%

Present Value

0

 £ 35,000.00

 £ -

-£ 35,000.00

 £ 1.00

-£ 35,000.00

1

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.90

 £ 6,216.22

2

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.81

 £ 5,600.19

3

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.73

 £ 5,045.22

4

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.66

 £ 4,545.24

5

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.59

 £ 4,094.81

6

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.53

 £ 3,689.02

7

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.48

 £ 3,323.44

8

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.43

 £ 2,994.09

9

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.39

 £ 2,697.38

10

 £ -

 £ 6,900.00

 £ 6,900.00

 £ 0.35

 £ 2,430.07

10

 £ -

 £ 2,300.00

 £ 2,300.00

 £ 0.35

 £ 810.02

Net Present Value (NPV)

 £ 6,445.73

Source: - (Please refer to the spread sheet for detail calculation)

5. Financial Analysis of the Case Project

From the above net present value of the financial proposal of the project A and B it can be seen that Project A is having the NPV of £ 9,160.47 and project B is having NPV of £ 6,445.73 while both the project is having same financial life. From this analysis, it can be seen that project A is having a higher NPV as compared to project B. The company should go for project A and invest the amount in this project to create high value. But for the deep analysis of the two project companies show use the Profitability index method for evaluation of the project because both the project is having different outflows with the same life period.

Particular

Project A

Project B

Profitability Index (PI)

0.31

0.18

Source: - (Please refer to the spreadsheet for detail calculation)

From the above, it can be seen that the PI of project A has been higher and can be observed that Project A should be accepted to create the value of the company through financial investment.

6. Sensitivity Analysis

Sensitivity analysis is done to evaluate the future uncertainty of the project concerning the micro and macroeconomic factor that can affect the future viability of the project. If the inflation rate of the market can be affected by 2 % then what will be the financial outcome of the financial outcome has been shown below:-

Sensitivity Analysis of Project A

Details

Existing position

If inflation increase by 2%

If inflation decrees by 2%

NPV

9160.47

 £ 9,568.48

 £ 8,743.15

Change in %

 -

0.04

-0.09

Source: - (Please refer to the spreadsheet for detail calculation)

From the above, it can be seen that if project A is influenced by the 2 % inflation rate then NPV of the project will be higher by the 4 % if it affects adversely then NPV will lower by 9%.

Sensitivity Analysis of Project B

Details

Existing position

If inflation increase by 2%

If inflation decrease by 2%

NPV

9160.47

 £ 6,878.84

 £ 6,002.77

Change in %

 -

-0.25

-0.10

Source: - (Please refer to the spreadsheet for detail calculation)

From the above, it can be seen that if project A is influenced by the 2 % inflation rate then NPV of the project will be lower by 25 % if it affects adversely then NPV will lower by 10%.

7. Other Non-Financial Decision-Making Factors

Every financial project has a financial and non-financial factor that affects the viability of the project and its acceptance can also be determined based on the non-financial factor. These non-financial factors include technology, employee attitude towards the new machine, employee skills and knowledge, impact of the new machine on existing production, a training program for a new machine, and the working environment. Hence the organization show also considers the nonfinancial factor before accepting the financial project (Deakin, 2016).

8. Selection of Best Alternative

From the above deep analysis of the financial and economic analysis of both the project, it can be seen that Project A is having the best outcome and providing the financial value to the company in upcoming years. This project will provide cost-saving to the company and also be part of the growth of the company. The NPV and PI of the project A us the higher than project B and show the best alternative as compare to project B hence Project A is the best alternative for the company (Lev, and Sunder, 2019).

9. Recommendation

Every business organization wants to grow in the market and create competition for the other entity. They want to establish in the market for a longer period and require the best outcome through the analysis of the various financial outcome of the company. From the above, it can be recommended that the company should accept project A to increase the financial growth of the company. And to improve the financial performance of the company it is also recommended that top management show improve its strategic policy of the company and create a new business policy that can provide a hike to the business and business performance of the company.

10. Conclusion

After an analysis of the financial project of the company, it has been observed that top management requires financial information to take the financial decision to contribute to their company performance. It can be concluded from the above analysis that project A will be beneficial for the company but the company still require to analyze the other financial and non-financial information for evaluation purposes. Sensitivity analysis also provides the consideration of the project for evaluating the purpose and help to create the nonfinancial information. It provides an analysis of the future uncertainty of the project concerning the market trend.

References

De Weerdt, J., Schupp, A., Vanderloock, A., andBaesens, B. 2013. Process Mining for the multi-faceted analysis of business processes—A case study in a financial services organization. Computers in Industry, 64(1), 57-67.

Deakin, E. B. 2016. Distributions of financial accounting ratios: some empirical evidence. The Accounting Review, 51(1), 90-96.

Edmister, R. O. 2012. An empirical test of financial ratio analysis for small business failure prediction. Journal of Financial and Quantitative analysis, 7(2), 1477-1493.

Helfert, E. A. 2012. Techniques of financial analysis (No. HG4026. H44 1967.). Dow Jones-Irwin.

Horrigan, J. O. 2018. A short history of financial ratio analysis. The Accounting Review, 43(2), 284-294.

Johnsen, T., andMelicher, R. W. 2014. Predicting corporate bankruptcy and financial distress: Information value added by multinomial logit models. Journal of Economics and Business, 46(4), 269-286.

Lev, B., and Sunder, S. 2019. Methodological issues in the use of financial ratios. Journal of Accounting and Economics, 1(3), 187-210.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help

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