Memo to Management

  • Category:
    Business
  • Document type:
    Assignment
  • Level:
    Masters
  • Page:
    2
  • Words:
    990

Widget Ltd

554534-4506

3/20/2017

To: Management

From: Certified Accounting consultant LLC

Subject: Investment Decision Analysis

Re; Investment Decisions

We have competed examining your investment analysis and provided the basis for our decision and the assumption used in arriving at our decision. We do believe that pour analysis and recommendation will best suit the business of your company.

Kindly find the attached investment analysis and decision-making we have prepared for your company

Kind regards

CC: Certified Accounting consultant LLC

Summary of the method

The project will use net present value method in evaluating the project viability. NPV is the difference between the present value of cash flows and the present value of cash outflow. The NPV method is important in capital budgeting to evaluate the profitability of the forecasted venture or project (Connolly, 2006).A positive NPV would imply that the project viable since it generates positive earnings (Earning is more than capital invested) generally, an investment with positive NPV will be viable while a negative NPV will not be recommended for investment since capital invested in the project will not be recovered.

Key findings

From the NPV analysis, it is evident that the project will generate a positive NPV of $11,578,856 unlike the purchase request of $ 15 million by Microsoft, which is a small margin. Recommendation on the project based on the base-case analysis in this regards, the company should decline the Microsoft offer and owned the product since, and the company will generate positive NPV within the shortest time possible
(Anton, 2006).

Estimation of the project’s base case NPV

Initial cost

Research cost

$ 5,200,000

Total Initial Cost

Equipment

$ 12,000,000

$ 36,230,000

Depreciation

$ 10,000,000

Net value

$ 2,000,000

Depreciation tax shield

$ 1,400,000

net working capital

accounts receivable

$ 21,500,000

accounts payable

$ 7,530,000

net working capital

$ 29,030,000

NPV Analysis of the project

Subscriptions

Variable cost

total Variables

Fixed cost

Cash flows

P.V.I.F 10%

Cash flows

$ 30,000,000

$ 6,000,000

25000000

$ (1,000,000)

$ 400,000

$ 363,636

$ 50,000,000

$ 8,000,000

25000000

$ 17,000,000

$ 18,400,000

$ 15,206,612

$ 55,000,000

$ 8,800,000

25000000

$ 21,200,000

$ 22,600,000

$ 18,677,686

$ 50,000,000

$ 8,000,000

25000000

$ 17,000,000

$ 18,400,000

$ 12,567,448

$ 30,000,000

$ 4,800,000

25000000

$ 200,000

$ 1,600,000

$ 993,474

$ 47,808,856

Initial cost

$ 36,230,000

Initial cost

$ 11,578,856

Recommendation on the project based on the base-case analysis from the above NPV analysis, it is evident that the project will generate a positive NPV of $11,578,856 unlike the purchase request of $ 15 million by Microsoft, which is a small margin. In this regards, the company should decline the Microsoft offer and own the product since, the company will generate positive NPV within the shortest time possible
(Few, 2009). The research is concluded by holding the following factors constant

  1. The effect of inflation will remain minimal and will not affect the forecast cash flow for the next five years

  2. The effect of comeptiton will not affect the forecasted dales for the company for the five year plan

  3. It is estimated that company’s subscribers will grow each financial year

  4. The company is having sufficient capital outlay to finance the new project.

Recommendations on further analyses and factors that should be considered prior to making a final decision on viewall

The company must ascertain the external factors that will affect the business operation. Some these factors are as follows

The economic situation

The company must ascertain the trend in economic performance locally and across the globe. The economic tend depict a signal of whether the business is improving and hence the number of subscribers will grow or whether the effect of inflation is growing which makes the purchasing power of indivudsal to declining.

Government policy

Prior to making a final investment decision, the company must ascertain the effect of government policy on the new product. If the new product is line with the government policy, then the investment alternative will be ideal for investment (Few, 2009). The political unrest in the countries may make the business unfavorable in the foreign market since, policy is created by political and they may create unfavorable policy to the foreign company.

The level of competition

The company must ascertain both the local and foreign competition in order to justify on the need for investing in the new project or not. Competition depicts a negative effect on the business perfomnce and hence, in making a five financial forecast, it is important to incorporate the extent and effect of the competition with regards to the new product.

Establishing the value of the product is intricate since there is diverse approach to evaluating the future cash flows. Due to time value of money, cash in the present is worth more than the similar amount at the prevailign time and because of inflation (Jack, 1995). The discount rate element of the net present formulae value is an approach of accounting for this. Firms might often have diverse approach of identifying the discounting rate. Common approach for establishing the discounting rate entails the use of expected returns of other venture alternative with same risks level that the rate of returns investor will expects or the cost linked to borrowing cash to fund the project.

Certified Accounting consultant LLC

Widget Ltd

Bibliography

Anton, D. (2006) Business Finance: The Fundamentals of Financial Management, New York: Cengage Learning.

Connolly, M. (2006) International Business Finance, London: John Wiley $ Son’s.

Ehrhardt, M. (2016) Corporate Finance: A Focused Approach — Page 575, New York: Springer.

Few, C. (2009) Advances in Investment Analysis and Portfolio Management — Volume 9, New York: Cengage Learning.

Industrial Systems Research (2013) The Business Finance Market: A Survey — Page 76, London : Pearson Education.

Jack, K. (1995) Personal Finance: Personal Financial Planner, 4th edition, New York: Irwin.

Narayanan, V. (2004) Finance for Strategic Decision-Making: What Non-Financial Managers, New York: Cengage Learning.

Paterson, A. (2016) Research Methods for Accounting anf Finance, London: John Wiley $ Son’s.