Unilever Case
- Submitted by: suzhuying
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- Category: Other
- Date Submitted: 03/19/2016 06:38 PM
- Pages: 5
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Investment Appraisal Report - CNC Milling Machine
SUMMARY
In section 1, all available information regarding the investment proposal is sorted out and scanned item-by-item. Useful data is identified and processed into inputs to next-step calculations of NPV, IRR and Payback period. Calculation method and details is described in section 2. Section 3 discusses key strategic factors ought to be taken into account. At last, recommendation is proposed based on above quantitative and qualitative analyses.
SECTION 1
QUANTITATIVE INFORMATION ANALYSIS
Future Cash flow projection through Year 1-4.
To translate previous profit projection into net cash flow projection (to calculate NPV), below items need to be adjusted:
* Other production expenses
Remove the irrelevant part: 16,000, 24,000, 24,000, and 16,000 (equals 20% of labour cost) according to incremental-basis principle.
* Depreciation
Add depreciation back when calculating cash flow.
* Administrative overheads
Since this is not extra expense incurred by the new machine, it ought to be removed according to incremental basis principle.
* Interest on loans to finance the project
This ought to be removed according to the principle that investment and financing considerations should be separated.
* Salvage value
The scrape value of ￡20,000 should be added at the end of the useful life of the machine.
* Marketing & Advertising
* Advertising start-up
The ￡40,000 of advertising and sales promotion at the start of the project should be included in capital outlay of the project.
* Yearly advertising expense
Add ￡8,000 of advertising expense into each year’s cash outflow.
* Consultation expense
The ￡18,000 of consultation expense should be viewed as sunk cost and thus be ignored.
* Impact on competing product
The project would lead to reduction in sales of a competing product. This effect should be factored into the incremental cash flows....
SUMMARY
In section 1, all available information regarding the investment proposal is sorted out and scanned item-by-item. Useful data is identified and processed into inputs to next-step calculations of NPV, IRR and Payback period. Calculation method and details is described in section 2. Section 3 discusses key strategic factors ought to be taken into account. At last, recommendation is proposed based on above quantitative and qualitative analyses.
SECTION 1
QUANTITATIVE INFORMATION ANALYSIS
Future Cash flow projection through Year 1-4.
To translate previous profit projection into net cash flow projection (to calculate NPV), below items need to be adjusted:
* Other production expenses
Remove the irrelevant part: 16,000, 24,000, 24,000, and 16,000 (equals 20% of labour cost) according to incremental-basis principle.
* Depreciation
Add depreciation back when calculating cash flow.
* Administrative overheads
Since this is not extra expense incurred by the new machine, it ought to be removed according to incremental basis principle.
* Interest on loans to finance the project
This ought to be removed according to the principle that investment and financing considerations should be separated.
* Salvage value
The scrape value of ￡20,000 should be added at the end of the useful life of the machine.
* Marketing & Advertising
* Advertising start-up
The ￡40,000 of advertising and sales promotion at the start of the project should be included in capital outlay of the project.
* Yearly advertising expense
Add ￡8,000 of advertising expense into each year’s cash outflow.
* Consultation expense
The ￡18,000 of consultation expense should be viewed as sunk cost and thus be ignored.
* Impact on competing product
The project would lead to reduction in sales of a competing product. This effect should be factored into the incremental cash flows....