EFB210 Finance 1 Capital Budgeting Report Grade 7 PDF

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Semester 2 2018, I got grade of 7 with this report and excel. ...

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EFB210 – CAPITAL BUDGETING REPORT [Author name] Assignment two| WORD COUNT: 601 Words

SUMMARY Blue Mountain Mining Ltd is a business that transport iron ore. The business conducted an investment proposal to consider whether the business should invest in autonomous trains following with several advantages and disadvantages. The objective of this report is to deliver a detailed financial analysis of each train option with a comparison between two types of trains and to determine which investment proposal is ideal.

METHODOLOGY A discounted cash flow (DCF) analysis was utilised to determine and estimate the potential investment opportunity for each train types. DCF purposes is to estimate the present value of the expected future returns on investments. This analysis evaluates all account for cashflows and risk by determining the net present value (NPV) and internal rate of return (IRR), Equivalent Annuity Value (AEV) and Benefit cost ratio (BCR). NPV method is more consistent with the objective of the firm, which fulfils the company’s objective of maximising firm value. Where, NPV is the difference between the present value of net cash flows from an investment and the present value of cash outflows over a certain period. Thus, from the results of the two options’ NVP, it can be used to describe the difference from the present and initial net cash flows and all future net cashflows was processed to their present value. In capital budgeting, NVP is used to analyse the profitability of a project or an investment. Hence, it is more reasonable to calculate NVP rather than the capital expenditure and initial outlay. IRR is the rate of return that equal to zero NPV. However, IRR and BCR cannot be an indicator for the comparison since it does not include the investment size, is too undescriptive, might consist of multiples of IRR when the cash flow is negative. AEV assumes that cash flows remain continuous throughout the cycle, although in this analysis there are limitations regarding to expenses and each option contains different replacement life, thus AE cannot be applied. Overall, NVP is an appropriate method that is utilised in this analysis to evaluate the profitability of each train option.

Recommendations Figure 1.

NPV

NPV Profile $5% $(20,000,000.00) $(40,000,000.00) $(60,000,000.00) $(80,000,000.00) $(100,000,000.00)

10%

15%

Locomotives Autonomous

$(120,000,000.00) $(140,000,000.00) $(160,000,000.00) $(180,000,000.00) Discount rate

In figure 1 above portrays the NPV profile comparison of the two options Locomotives and Autonomous with three different discount rates at 5%, 10% and 15%, where 10% is the actual discount rate in the analysis. At 5%, Autonomous trains’ NVP is lower than Locomotives’ NVP, however as the discount rate increases the Locomotives’ NVP becomes significantly smaller than Autonomous NVP. It is noticeable that Autonomous’ NVP only works with lower discount rates. Taken into consideration in the analysis, locomotives have a replacement life of 15 years, meanwhile Autonomous trains have no replacement as it goes by the life of the mine. Hence, this indicates that Locomotives with a 15-year replacement life can generate a better value than no replacement life at the same period. In this case, at the actual discount rate (10%), Locomotives’ NVP is better investment option than Autonomous, due to its smaller negative figure than Autonomous’ NVP.

Limitation There are several limitations regarding to the financial analysis, which would cause discrepancies. Fuel, maintenance and salaries expenses are variable expenses that would not remain the same within the life of the mine (30 years), due to inflation and changes to salary. In this case it will affect the results of the analysis and the assumption is that these values will remain the same for over 30 years. The discount cash flow can be a limitation, since most free cash flows are made by assumptions provided by the analyst, if there are any adjustment in the assumptions it can affect the discounted cash flow analysis....