Finance Project Essay Example | Topics and Well Written Essays - 1250 words

Finance hurtle - Essay ExampleAs the project considers a period of ten years critical paygrade is required to decide the outcome of the project. Analysis 1. The expected cost for the project Year Expected cost(in one thousand million dollars) 1 25 2 28 Opportunity cost of the project= 8% Present entertain of the cost of the project Cost (i) Discounting factor at 8 % (ii) Present value (i*ii) 25 0.926 23.15 28 0.857 23.996 2. Present value of the after tax cash profit Year( i) Cash flow(after tax) (in million $) (ii) Discounting factor at 8% (iii) Present value(ii*iii) 3 6 0.794 4.764 4 7 0.735 5.145 5 8 .681 5.448 6 9 0.63 5.67 7 9 0.583 5.247 8 9 0.541 4.869 9 9 0.5 4.5 10 9 0.463 4.167 11 9 0.429 3.861 12 9 0.397 3.573 Total bear value of cash flows=$47.244. Discounting Factor values (Present look upon of an cut-and-dried Annuity Table, n. d) 3. Expected Net present value= Present value of the total cash inflow-the present value of the total cash outflow= 47.244-(23.15+23.99 6) (Kapil, n. d, p.399) = $ 0.098(in millions) As the figure here reflects a positive NPV so the project go away be beneficial to the organization and should be accepted. The calculation of the Net Present Value is a method of Capital Budgeting which is done to critically evaluate the profitability behind the implementation of a new project. The positive value in the result favors the acceptability of the project. 4. Risk inherent to the project The commonalty jeopardizes which are associated with any blood are business risk, financial risk and market risk. Business risk involves the risk under which the solid is ineffective to cover the operational cost associated. In the shift of big businessman Co, it is planning to install new generator thinking about the increase in demand. A regard assumes that the building process will take 2 years and in the two years time, in that respect will not be much inflow from the new generator involved. If the risk arises in the business that the involvement of the new project will pose a difficulty in raising the operating cost of the project, then the business runs the probability of becoming insolvent. The next type of risk which the business is apt(predicate) to face is the financial risk. Financial risk involves the mode of financing for the project. The firm may be unable to meet its financial obligation for the project. In such case the debt of the firm will increase and the firm will not be able to realize the expected profit. In dealing with such considerate of risk Power Co should be careful in choosing its mode of finance. It should chose an option which appears flexible for the business, it will be better if the firm chooses optimum financial mix for the purpose which should have a immense amount of the portion of the equity. (Gitman, 2007, p.427) A portion of the equity in the financing raises confidence among the investors and also does do good the organization in the long run. The organization is relieved of the burden of repaying the debt to some extent in case of mixed financing. The final type of risk inherent in the business is the market risk. It is to be remembered that the principal(prenominal) reason of Power Co in opting for the installation of the new generator is the prediction of the rise in demand. Power Co forecasted that within the next ten years their rate of production will be insufficient as they are the major suppliers of electricity in the region. However the