Project Design Evaluation Proof Reading Services

Project Design Evaluation Assignment Solution

Project Design Evaluation Proof Reading Services

Introduction

The report deals with a detailed analysis of the two projects that have been proposed to be undertaken by the company i.e. T-REC and P-REC on various parameters. The project has been conducted to understand whether to undertake the project, if yes, which project should be undertaken and then evaluation of such project on the qualitative parameters.

Findings

Quantitative Findings (P-REC)

Before analysing the findings made in Appendix attached to the document, it shall be important to understand assumptions which are undertaken to understand the results better:

Expenditure incurred towards training expense of human resource management is a capital expenditure and the same is not depreciable. Further, no tax benefit is available on same;

1. The duration of project is 8 years; 
2. Renovation cost is depreciable and has been depreciated over 8 years
3. The asset has been sold at the end of 8 years;
4. Loss on sale and corresponding tax benefit on the same has been considered for analysis purpose;
5. Working capital has been realised at the end of the project;
6
. R&D expenditure has been considered as sunk cost and not tax deductible.

On the basis of analysis have been conducted based on 4 parameters, the information n the same has been detailed here-in-below:

1. Discounted Payback period:Under the said tool of capital budgeting, the period under which the initial cash outflow shall be realised is taken into consideration. Further, the method pay importance to time value of money and discounting to cash flows realised over the period is carried to ascertain the present value of the cash flows.

In the case of P-REC, cash flows have been discounted at 18% and 24% to understand the discounted payback period of the project. Accordingly, the discounted payback period of the project stands at 5.25 years and 6.43 years respectively which is greater than 5 years. Further, a brief snapshot of the computation is provided here-in-below:

Sl NO

Particulars

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Terminal Value

1

Operating Cash flow before Tax

-2890000

748060

748060

748060

748060

1336060

1336060

1336060

1336060

310000

2

Tax

 

-224418

-224418

-224418

-224418

-400818

-400818

-400818

-400818

27600

3

Depreciation

 

306000

306000

306000

306000

306000

306000

306000

306000

 

4

Net Operating Cash flow

-2890000

829642

829642

829642

829642

1241242

1241242

1241242

1241242

337600

5

Discounting Factor @18%

1

0.847458

0.718184

0.608631

0.515789

0.437109

0.370432

0.313925

0.266038

0.266038164

6

Discounted Cash Flow

-2890000

703086.4

595836

504945.7

427920.1

542558.3

459795.2

389656.9

330217.7

89814.48408

7

Net Present Value

1153831

 

 

 

 

 

 

 

 

 

8

Cumulative

-2890000

-2186914

-1591078

-1086132

-658212

-115653

344141.8

733798.7

1064016

1153830.921

9

Discounted Pay back period

 

 

 

 

 

 

5.251532

 

 

 

10

Discounting Factor @24%

1

0.806452

0.650364

0.524487

0.422974

0.341108

0.275087

0.221844

0.178907

0.178906664

11

Cumulative

-2890000

-2220934

-1681364

-1246228

-895311

-471914

-130464

144898

366964.4

427363.3353

12

Discounted Pay back period

 

 

 

 

 

 

 

6.473792

 

 

The project is not feasible based on the requirement of the organisation to have discounted payback period less than 5 yeats.

2. Net Present Value: The second tool used for analysing P –REC is Net Present Value which is used to understand the net excess cash flow from the project by reducing outflow from inflow. This method recognise the importance of time value of money. Further, positive NPV indicates that the project should be accepted.[ CITATION The18 \l 16393 ] The formula that is used for computation is detailed here-in-below:

Net Present Value = Present value of Inflows – Present Value of Out flows.

In the case of P-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the net present value of the project stands at $11,53,831/- and $4,27,363/- respectively. The snapshot of the computation has been presented here-in-below

Year

Cash flows @18%

Cash flows @24%

0

-2890000

-2890000

1

703086

669066

2

595836

539569

3

504946

435137

4

427920

350917

5

542558

423397

6

459795

341449

7

389657

275362

8

420032

282465

Total

1153831

427363

The project is feasible as it has a positive net present value at both 18% and 24% discounting rate.

3. Internal Rate of Return:This is acapital Budgeting tool undertaken to ascertain the rate of return from the project undertaken. The method involves ascertaining the rate of discount at which the outflow of the project is equal to inflow.[ CITATION Inv18 \l 16393 ]

In case of P-REC, the internal rate of return stands at 24%, a brief snapshot of the same has been detailed here-in-below:

Year

Cash Flows

0

-2890000

1

829642

2

829642

3

829642

4

829642

5

1241242

6

1241242

7

1241242

8

1473242

IRR

28%

Since, project IRR is greater than 24 % , project is feasible

3. Profitability Index: The fourth tool used for analysis is profitability index which is computed on the basis of Present Value of inflow/ present value of outflow.[ CITATION ROS18 \l 16393 ]

In the case of P-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the PI of the project stands at 1.399 and 1.148 respectively.

Since PI is greater than 1 at both discount rates i.e. 18% and 24% project shall be accepted

Quantitative Findings (T-REC)

Before analysing the findings made in Appendix attached to the document, it shall be important to understand assumptions which are undertaken to understand the results better:

Expenditure incurred towards training expense of human resource is a capital expenditure and the same is not depreciable. Further, no tax benefit is available on same;

1. The duration of the project is 8 years;
2. Renovation cost is depreciable and has been depreciated over 8 years
3. The asset has been sold at the end of 8 years;
4. Loss on sale and corresponding tax benefit on the same has been considered for analysis purpose;
5. Working capital has been realised at the end of the project;
6. No other cost has been considered for analysis;
7. R&D expenditure has been considered as sunk cost and not tax deductible.

On the basis of analysis have been conducted based on 4 parameters, the information n the same has been detailed here-in-below:

1. Discounted Payback Period:

In the case of T-REC, cash flows have been discounted at 18% and 24% to understand the discounted payback period of the project. Accordingly, the discounted payback period of the project stands at 7.024 years and unrealisable respectively which is greater than 5 years. [ CITATION Pay18 \l 16393 ]

The project is not feasible at 24% discounting rate.

2. Net Present Value:

In the case of T-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the net present value of the project stands at $2,20,794/- and -$2,34,538/- respectively.

The project is not feasible at 24% discounting rate.

Internal Rate of return of the project is 22% for T-REC.

3. Profitability Index

In the case of T-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the PI of the project stands at 1.076 and .9188 respectively.

The project is not feasible at 24% discounting rate.

Qualitative Findings

The qualitative factors that must be taken into consideration for analysing the project has been detailed here-in-below:

The project proposed to be undertaken i.e P-REC is risky as the same might cause long term hazard to the company on account of not being fully clinically tested. The impact of the same may adversely impact the cash flows stated above;

There might be litigation and dispute on account of undertaking the project and the same shall hamper the future prospect of the company;

Since the Pharmaceutical Sector is prone to litigation and bans risk of such kind may in the long result in closure of the company;

Further, one should consider the competitor action and the response of them and the above computation might not hold true if any competitor launches similar product with better results;

For T-REC, it is clinically safe and tested but the same is not feasible @24% discounting rate. However, it is less prone to litigation and the above result shall hold good unless any drastic change take place in economy or on account of any major innovation;

Recommendation and Justifications

The company should carry out the production of T-Rec if the cost of funding is less than 18% and shall launch P-Rec post clinical testing and understanding the side impact, even though the analysis carried out above is in favour of P-REC as the said situation might not hold good in case of any litigation and dispute which shall impact the continuity of business.

Detail Comparison and Further Recommendation

Thedetailcomparison has been presented here-in-below:

Sl No

Particular

P-REC

T-REC

1

Discounted Pay Back period @18%

5.251532

7.024696201

2

Discounted Pay Back period @24%

6.473792

Never Paid off

3

Net Present Value @18%

1153831

220793.9465

4

Net Present Value @24%

427363.3

-234538.2196

5

Internal Rate of Return

28%

22%

6

Profitability Index @18%

1.40

1.08

7

Profitability Index @24%

1.15

0.92

On the basis of quantitative analysis, project P-REC shall be accepted but looking at qualitative aspect company should not go for P-REC as it shall tarnish the image of the company in the long run.

Conclusion

On the basis of above analysis, T-REC shall be accepted

References:

1. InvestingAnswers, Inc. (2018). Internal Rate of Return (IRR). Retrieved October 1, 2018, from investinganswers.com: https://investinganswers.com/financial-dictionary/investing/internal-rate-return-irr-2130
2. Payback Period & Discounted Payback Period | Formula | Example. (2018). Retrieved October 1, 2018, from www.wallstreetmojo.com: https://www.wallstreetmojo.com/payback-period-discounted-payback-period/
3. PEAVLER, R. (2018, july 23). The Profitability Index. Retrieved October 1, 2018, from www.thebalancesmb.com: https://www.thebalancesmb.com/the-profitability-index-392917
4. The Pennsylvania State Universit. (2018). Net Present Value,Employee Benefit Cost Ratio, and Present Value Ratio for project assessment. Retrieved October 1, 2018, from www.e-education.psu.edu: https://www.e-education.psu.edu/eme460/node/608