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Ref No: 1396
To: Board of Directors
Subject: Investment Appraisal
The following report provides the revised financial Investment appraisal case analysis done and the changes made in doing so. Also, the report advices on whether the project is financially feasible for investment or otherwise and what other factors should be considered before going ahead.
Revised Financial Analysis
| Boots Investment Case: Big Town Project | |||||||||||
| Financial Analysis | |||||||||||
| 1.9.2016 | 31.8.2017 | 31.8.2018 | 31.8.2019 | 31.8.2020 | 31.8.2021 | 31.8.2022 | 31.8.2023 | 31.8.2024 | 31.8.2025 | 31.8.2026 | |
| year | – | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| % sales growth | 17% | 13% | 9% | 7% | 4% | 4% | 3% | 3% | 3% | ||
| Average Weekly Takings | 52 | 61 | 69 | 75 | 80 | 83 | 86 | 89 | 92 | 95 | |
| Revenue | 2,028 | 3,172 | 3,588 | 3,900 | 4,160 | 4,316 | 4,472 | 4,628 | 4,784 | 4,940 | |
| less: opportunity costs | (390) | (520) | (520) | (520) | (520) | (520) | (520) | (520) | (520) | (520) | |
| Revised Revenue | 1,638 | 2,652 | 3,068 | 3,380 | 3,640 | 3,796 | 3,952 | 4,108 | 4,264 | 4,420 | |
| Gross profit (50%) | 819 | 1,326 | 1,534 | 1,690 | 1,820 | 1,898 | 1,976 | 2,054 | 2,132 | 2,210 | |
| Property lease rental | (300) | (300) | (300) | (300) | (300) | (400) | (400) | (400) | (400) | (400) | |
| Other costs (Note 1) | (600) | (618) | (637) | (656) | (675) | (696) | (716) | (738) | (760) | (783) | |
| Operating cash flow | (81) | 408 | 597 | 734 | 845 | 802 | 860 | 916 | 972 | 1,027 | |
| less:Tax payments | (82) | (119) | (147) | (169) | (160) | (172) | (183) | (194) | (205) | ||
| lesss: Incremental Working Capital | (203) | (114) | (42) | (31) | (26) | (16) | (16) | (16) | (16) | (16) | |
| One off costs | (100) | ||||||||||
| Capital investment | (900) | ||||||||||
| Net cash flow | (1,000) | (284) | 212 | 436 | 556 | 650 | 626 | 672 | 717 | 762 | 806 |
| Present Values at Discount rate (11%) | (1,000) | (256) | 172 | 319 | 366 | 386 | 335 | 324 | 311 | 298 | 284 |
| NPV | 1,539 |
Table 1 – Financial Analysis for Boots (1)
| Internal Rate of Return | |||||||||||
| Discount rate of | 30% | ||||||||||
| (1,000) | (218) | 125 | 199 | 195 | 175 | 130 | 107 | 88 | 72 | 58 | |
| 30% | (69) | ||||||||||
| 11% | 1,539 | ||||||||||
| IRR computation | 0.96 | 0.18 | |||||||||
| IRR | 29% |
Table 2 – Financial Analysis for Boots (2)
Changes Made in Revising the Analysis
Firstly, the £50k costing feasibility study included in the initial investment calculation has been eliminated as it is a sunk cost that is unaffected by the decision to take up the project as it has already been incurred, a phenomenon also explained by Ahuja, Dawar and Arrawatia (2015). Furthermore, opportunity cost that will result directly due to the project, amounting to £10k per week has been deducted from the total revenue.
Also, allocated fixed cost of £25k has been deducted from other costs as it is not incremental or a direct consequence of the project but simply allocation of overheads already being incurred by the company. Moreover, the inflation rate of 3% has been applied to the remaining other costs year on year to reflect future nominal values. Furthermore,
the lease rentals have been revised to £400k from year 6 onwards to reflect realistic assumptions, and incremental working capital that will be required has been deducted from the operating cash-flow by basing it on 10% of annual revenue. Finally, depreciation has been eliminated in the revised working as it non-cash flow item; this idea is also stated by Kim and Kim (2009). Finally, since the first year is only 9 months that is from December 2016 to August 2017,
the weeks in the first year have been changed from 52 to 39….
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