1,945
7
Essay, 3 pages (600 words)

Supply chain management

SBX Construction Company Investment analysis – Horizontal Boring Machine: EATCF Stream:   Year Year 2 Year 3 Year 4 Year 5 NOI 20000 20000 20000 20000
20000
-Depr. Exp.
-10000
-10000
-10000
-10000
-10000
Net Income (BT)
10000
10000
10000
10000
10000
-Inc. Tax
-4000
-4000
-4000
-4000
-4000

= Net Income (AT)
6000
6000
6000
6000
6000

Adjusting Accrual to Reflect Cash Flow
-Cap. Impr. Exp. s
0
0
0
0
0
+ Depr. Exp.
10000
10000
10000
10000
10000
+ Tax Claim
2000
2000
2000
2000
2000
EATCF
$18000
$18000
$18000
$18000
$18000
NPV @ 10% for the Equipment Investment:
Capital Expenditure (Year 0)= $50000
Cash Flow (Year 1 to 5) = Net Operating Income – Income Tax + Tax Claim
= ($30000 – $10000) – ($4000) + ($2000)
= $18000
Discounted Cash Flow= $18000 * (1/1. 1 + 1/1. 12… +1/1. 15)
= $18000 * (3. 790)
= $68220
NPV @ 10%= -$50000 + $68220
= $18220
Year
EATCF
Discount Factor
PV
0
-50000
1
-50000
1
18000
0. 909
16362
2
18000
0. 826
14868
3
18000
0. 751
13518
4
18000
0. 683
12294
5
18000
0. 621
11178

NPV
18220
IRR for the Investment:
NPV @ 10% = $18220
NPV @ 20% = -$50000 + ($18000 * 2. 989)
= -$50000 + $53802
= $3802
NPV @ 22%= -$50000 + ($18000 * 2. 8636)
= -$50000 + $ 51552
= $1552
NPV @ 24%= -$50000 + ($18000 * 2. 7454)
= -$50000 + $49392
= -$608
IRR= 23. 5%
Discount Rate
NPV
10%
18220
20%
3802
21%
2668
22%
1552
23%
454
24%
-608
Memo to the Project Manager:
Though the initial investment is high ($50000), the cash flow (EATCF) stream indicates that the payback period is approximately, 2 years and 10 months. Also, the cash flow stream is steady (after the payback period as well). Hence the payback period suggests that the investment is profitable. However, this value alone cannot be relied upon to make the final decision, as the cash flows are not discounted.
The NPV calculations at 10% discount rate, indicates that the current value of the investment is $18220 (positive value). Hence NPV suggests that it is a profitable investment. However, this conclusion entirely depends on the method used to compute the discount rate and it has not been clearly specified whether inflation and other economical changes have been accommodated in this discount rate.
The required IRR for the investment is 15%. But the actual IRR for the investment turns out to be 23. 5%, which is higher than the required rate. This indicates that the investment is preferable, when the required and actual IRR values are concerned. IRR indicates the discount or interest rate at which NPV equates to zero, i. e., a ‘ no gain – no loss’ situation. Higher this rate, higher is the margin of safety. As the actual IRR is higher than the required IRR for the investment, it is clear that the investment is profitable and SBX has a safety margin of about 5. 5 %, in case any of the estimations go wrong.
All these discussions indicate that the investment on the horizontal boring machine is profitable and should be taken up by SBX Construction Company.
Assumptions and controversies:
Depreciation is straight line and the salvage value is zero – Straight line depreciation is not a valid measure and it is highly unlikely for the salvage value to be zero (at least equals to scrap value in real case)
No increase in working capital requirements and no tax credits – Again, highly unlikely in real case scenarios
Operating costs and revenues to be consistent – Unlikely

Thank's for Your Vote!
Supply chain management. Page 1
Supply chain management. Page 2
Supply chain management. Page 3
Supply chain management. Page 4
Supply chain management. Page 5
Supply chain management. Page 6
Supply chain management. Page 7
Supply chain management. Page 8

This work, titled "Supply chain management" was written and willingly shared by a fellow student. This sample can be utilized as a research and reference resource to aid in the writing of your own work. Any use of the work that does not include an appropriate citation is banned.

If you are the owner of this work and don’t want it to be published on AssignBuster, request its removal.

Request Removal
Cite this Essay

References

AssignBuster. (2022) 'Supply chain management'. 23 September.

Reference

AssignBuster. (2022, September 23). Supply chain management. Retrieved from https://assignbuster.com/supply-chain-management-essay-samples-10/

References

AssignBuster. 2022. "Supply chain management." September 23, 2022. https://assignbuster.com/supply-chain-management-essay-samples-10/.

1. AssignBuster. "Supply chain management." September 23, 2022. https://assignbuster.com/supply-chain-management-essay-samples-10/.


Bibliography


AssignBuster. "Supply chain management." September 23, 2022. https://assignbuster.com/supply-chain-management-essay-samples-10/.

Work Cited

"Supply chain management." AssignBuster, 23 Sept. 2022, assignbuster.com/supply-chain-management-essay-samples-10/.

Get in Touch

Please, let us know if you have any ideas on improving Supply chain management, or our service. We will be happy to hear what you think: [email protected]