Cash Budget Analysis
This case looks at three investment opportunities, and provides analysis of the three scenarios on the bases of NPV and IRR. NPV evaluates the effectiveness of the project by comparing the difference between the initial costs intended to be invested and the discounted projected cash inflows after deducting tax amount. IRR is the rate of interest that makes NPV equal to Zero. IRR gives an indication of how well the money of investors is being invested.
Findings:
In the first case the assumption is that this is the only option that is evaluated. NPV of the project is positive. Which means that the project should be accepted, because the discounted cash flows of the project will cover the initial outlay costs in the five years. Also the IRR is bigger than the weighted average cost of capital, which makes the project acceptable.
In part b we conducted a sensitivity analysis where several variables which are unit Terminal Value of Land, First Year Solar Panel, Price per Panel, Unit Sales Growth rate and Variable costs as % of sales, are analyzed by once decreasing these variables by 20%, and then increasing them by 20%. From the findings of this analysis, Variable costs as % of sales is the most sensitive, but it still recorded a positive NPV, however IRR is less than cost of capital.
By looking at the three projects opportunity 1 is the best using WACC and IRR to compare among them. This opportunity has IRR higher than the WACC meaning that, the interest on investment is more than the cost of capital and there, there are returns while in other options, they have less IRR compared to cost of capital WACC.