When a company upscales its operation by acquiring resources to help increase its production so that it meets the demand of the customers the available resources that the company has might be strained. This can make several stakeholders concerned about the project since it might break or make the company. Therefore, it is important for the managers to carefully analyze several logistics involved when carrying this high magnitude operations. Therefore, this paper highlights how different logistics such as Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Criteria can determine the acceptability of the project. Also, the paper with depicts how net working capital, depreciation, and taxation determines the cash flow of the project.
According to Ajulibe, Ogolo, & Ikiensikimama, (2018) Net Present Value (NPV) is the total of present values of the outflows and cash flow. In the case of Jon Smedley, the NPV of the company is 21,093 and 115,908 when the interest rates are 8% and 18% respectively. Ajulibe, Ogolo, & Ikiensikimama (2018) observed that if NPV is positive, it implies that the value of cost (cash outflows) is less than the values of revenues (cash inflows). In our case, Jon Smedley the investment option is positive and therefore it is viable (Guleria, Tiwari, & Sharma, 2017). When interest rate of the company is 18%, it has a strong NPP positive value compared to when the interest rates is at 8%, this implies that the company will have more cash inflows when the interest rate of the company was at 18 percent. A stronger positive cash outflow of NPP at 18% is attributed to lower payment of loan since the loan repay instalment is distributed over long period.
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Guleria, Tiwari, & Sharma (2017) noted that Internal Rate of Return (IRR) is used by companies to measure the projects cash flow and liken it to the feasibility of an investment/project. In incidences where IRR is positive then it is likely to give returns and vice versa (Nekrasova, Leventsov, & Axionova, 2016). Jon Smedley’s IRR is 30% and 20% when the interest rates are 8% and 18% respectively. 20% IRR is the best plan even the return of investment is low it has higher dollar value opportunities; this plan is very effective to the company. At 8% interest, the company has IRR of 30% (Ajulibe, Ogolo, & Ikiensikimama, 2018). This percentage is high implying the plan has very high rate of return and the project is lucrative. However, this plan is inferior to the plan of 18% interest rate because it has a lower dollar value opportunity hence impacting less on the project.
According to Ajulibe, Ogolo, & Ikiensikimama, (2018) Payback Criteria is important because it helps calculate the length of time required to recover the initial investment. Payback Criteria is used mainly to compare similar investments so that the best available option is selected. In the case of Jon Smedley, the Payback Criteria of 8% and 18% is 3.2 and 3 years respectively. Guleria, Tiwari, & Sharma (2017) observed “The project with a shortest payback period has less risk compared to the project with longer payback period. The payback period is often used when liquidity is an important criterion to choose a project.” For Jon Smedley the payback period three years is the best option since it has less risk to the investors. This plan would easily attract investors since they would get their money in a half a year early compared to the investments that has 18 percent interest rate. According to Ajulibe, Ogolo, & Ikiensikimama, (2018) Payback Criteria method is most appropriate to analyze investments or projects that are small since it is unworthy to spend much effort and time on complicated economy evaluation in such projects. Therefore, in our case, Payback Criteria is not the most suitable way to determine suitability of Knyttan’s project since it is a huge project.
According to Nekrasova, Leventsov, & Axionova, (2016) any changes in net working capital is reflected in cash flow of a company. In incidences where transaction increases current liabilities and assets by equal amount, there will be no alteration in net working capital (Ajulibe, Ogolo, & Ikiensikimama, 2018). Current liabilities and assets mainly determine net working capital; the project cashflow will vary depending on how current assets and liabilities of a company varies.
Guleria, Tiwari, & Sharma (2017) highlights that depreciation does not impact cashflow of a company directly since it is a noncash accounting charge. Nevertheless, as long as there is adequate taxable income to engross it, depreciation is a tax-deductible expense and decrease the cost of a tax, which affect the project cash flow positively.
Taxes are included when calculating the operating cash flow which in turn affects cash flows of the project. Shirazi, Taylor, White, & Morrison, (2016) observed “Cash flow from operating activities is calculated by adding depreciation to the earnings before income and taxes, and then subtracting the taxes. The operating cash flow indicates the cash a company brings in from ongoing, regular business activities.” In the cash flow of a project items such as taxes and depreciation are included to adjust the total income of a project, rendering an accurate financial picture (Ajulibe, Ogolo, & Ikiensikimama, 2018). Investors find it crucial to examine a project’s after-tax cash flow since it depicts the ability to reimburse dividends.
References
Ajulibe, D., Ogolo, N., & Ikiensikimama, S. (2018, August). Viability of SiO 2 Nanoparticles for Enhanced Oil Recovery in the Niger Delta: A Comparative Analysis. In SPE Nigeria Annual International Conference and Exhibition. Society of Petroleum Engineers.
Guleria, A., Tiwari, P., & Sharma, R. (2017). Cost of Cultivation and Economic Feasibility of Grafted Harar (Terminalia chebula) In Himachal Pradesh. Int. J. Pure App. Biosci, 5(2), 1005-1011.
Nekrasova, T., Leventsov, V., & Axionova, E. (2016). Evaluating the efficiency of investments in mobile telecommunication systems development. In Internet of Things, Smart Spaces, and Next Generation Networks and Systems (pp. 741-751). Springer, Cham.
Shirazi, A., Taylor, R. A., White, S. D., & Morrison, G. L. (2016). Transient simulation and parametric study of solar-assisted heating and cooling absorption systems: An energetic, economic and environmental (3E) assessment. Renewable Energy , 86 , 955-971.
