Financial Management 2 2

Introduction
Companies are required to perform financial analyses to identify their liquidity, performance
stability, and future performance. Similarly, companies by estimating the financial performance
and analysis could identify their key strengths, weaknesses, opportunities, and threats while
simultaneously working on the deficit factors to maximize the growth and profit. Trump De
Tomato Company is a company specialized in the farming of aquatic organisms that operate a
new farm in sandy bay. The project involves the price of 1,000,000 dollars. Subjected to the
depreciation for tax purpose and accounting companies are expected to use for up to 5 years and
scap it with zero value. The equipment will require 5000 maintenance costs. Similarly, the
renovation includes the cost of 200,000 assuming there won't be a tax deduction of capital.
Discuss which cost is relevant for the evaluation of the project and which is not relevant
The project involves the cost which is relevant and which is not relevant. Out of the total cost
given, the cost that is relevant for the evaluation of the project is following:
- Capital Expenditure: the capital expenditure is relevant for the evaluation of the project
as it involves huge investment associated with the project. The capital expenditure
involves the initial investment for the purchase of land which is worth 1,000,000 dollars.
- Working capital: Working capital involves the cost associated with covering the daily
expenses of the company. The working capital involves the daily cost such as material
costs which lasts over the period of 5 years.
- Operating Expenses: The operating expenses are also the cost that needs to be included in
the project. It includes the cost associated with the project and involves the cash relevant
for the increment of cash flow after tax. The additional cost that is expected to include in
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the project is annual labor cost, maintenance cost, operating fixed cost, tax expenses, and
costs.
Non Cash Expenses
While evaluating the project such expenses are not included in the project. Non-cash
expenses such as depreciation are not included in the evaluation of the net present value of
the project. Depreciation is the investment expenditure and is not included in capital
expenditure.
Calculation of Initial Investment Cash Flow
Initial investment cash flow refers to the cash invested by the company before the beginning
of the project. Such cash involves big capital expenditures such as the purchase of
equipment, machinery, and other projects that involve huge cash outflow. The initial
investment outlay of Trump de Tomato Company involves following expenses
Expenses associated with the purchase of land worth 1,000,000.
Purchase of Equipment worth 1,000,000
Renovation of warehouse costing 200,000
Calculation of Operating Cashflows
The operating cash flow of the trump de tomato company involves the cash associated with
the project that is equal to net operating profit after tax added with amortization and
depreciation. It is calculated by using the following formula:
Estimated operating cashflow = Earning before tax and depreciation – Depreciation *(1-tax
rate) + D& A
2
Year Cashflow from operating activities
1 $300,100
2 $405,940
3 $557,890
4 629292
5 625717
4. Calculation of the Payback period assuming the project is sold after 5 years.
The net cash flow of the project at the initial stage is $2,200,000. After recovering the cash
inflow of 300,100 in the first year, 405,940 in the second year, 557,898 in the third year, and
629,292 in 3rd year the company sold the project to recover the cash. So, overall the company is
required the time 4.19 years for the cash flow to recover the investment without selling the
project at 5 years.
5. Calculation of Net present value: Initial Investment sold for 1 million after 5 years.
- The cost of the project at the initial stage is 2,200,00. The calculation of the weighted average
cost of capital shows that the WACC of the project is 10.65%. So, when Net cash flow is applied
and the cost of capital is considered, the net present value becomes $214,371.98
The project having positive net present value generates the cash that exceeds the cost associated
with the initial investment. Therefore, the project is good in terms of investment as it generates a
net present value that is positive.
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Calculation of Internal Rate of Return.
The internal rate of return refers to the rate at which the cash flow becomes zero. The calculation
of the internal rate of return using the weighted average cost of capital shows that IRR is
13.55%. Higher the internal rate of return than the cost of capital, beneficial the project becomes.
Therefore, the project is positive for the investment and generates positive cash flow.
Recalculation of Net present value using sensitivity analysis
Scenario 1: Decrease in project sales by 10% annually
If there is a decrease in project sales by 10% annually, the net present value of the project will
fall by -74,124. The negative figure of the project clearly shows that the project is not profitable.
The reduction of sales leads to a decrease in total production and reduction of production
quantity that ultimately impacts the variable cost and material cost.
Increase in Sales by 5% annually
If trump de tomato increases its sales by 5% annually, it will have a positive effect on sales price
as it doubles the result of the company compared to the original NPV that considers the increase
in revenue.
Increase of Material Costs Changes from 3.5% to 8%
In the scenario, when the material cost of the company increases from 3.5% to 8% leads to an
increase in the net present value of the company. Though the net present value of the company is
lower than the original, it is advisable for the company to accept the project as the revenue
generated is greater than the initial investment outlay.
Impact of Covid 19 and change in the outcome of the project
The covid 19 pandemics have resulted in disastrous volatility across the industries causing the
investors to prefer risk-free assets over the company stocks. Assuming the industry has the
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impact of covid that resulted in difficulty of seafood trade, the cost of equity involves 14.80%
which is calculated by adding 1 percent of CVRP. The WACC involves increasing the value to
11.25%.
Recommendation
The project generates positive net present value and internal rate of return which shows that
management generates profit if it accepts the project. Furthermore, the project involves support
through the identification of the company’s amount and acceptance. However, the shorter the
payback period, profitable the project. Therefore, it is advisable for the company to eliminate
weaknesses and accept the project.
Conclusion
It is advisable for trump de temp

Financial Management 2 2

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Introduction

costs which lasts over the period of 5 years.

Non Cash Expenses

Calculation of Initial Investment Cash Flow

investment outlay of Trump de Tomato Company involves following expenses

Expenses associated with the purchase of land worth 1,000,000.

Purchase of Equipment worth 1,000,000

Renovation of warehouse costing 200,000

Calculation of Operating Cashflows

depreciation. It is calculated by using the following formula:

net present value that is positive.

Recalculation of Net present value using sensitivity analysis

Scenario 1: Decrease in project sales by 10% annually

Increase in Sales by 5% annually

Increase of Material Costs Changes from 3.5% to 8%

generated is greater than the initial investment outlay.

Impact of Covid 19 and change in the outcome of the project

weaknesses and accept the project.

It is advisable for trump de temp

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