Vienna Orthopedics: Financial Viability of the Management

Cash flow computations

VIENNA ORTHOPEDICS PTY LTD EXPANSION PLAN
Income Capital Expenditure
Fitting Machine Furniture
Year1 $300,000.00 Year 1 $50,000.00 $25,000.00
Year2 $330,000.00 Year 2
Year3 $363,000.00 Year 3
Year4 $399,300.00 Year 4
Year5 $399,300.00 Year 5 ($5,000.00)
Direct costs Working capital
Year 1 $60,000.00 Year 1 $10,000.00
Year 2 $66,000.00 Year 2
Year 3 $72,600.00 Year 3
Year 4 $79,860.00 Year 4
Year 5 $79,860.00 Year 5 ($10,000.00)
Overheads
Year 1 $125,000.00
Year 2 $131,250.00
Year 3 $137,812.50
Year 4 $137,812.50
Year 5 $137,812.50
Net Present value computation
Income Direct Costs Overheads Net cash inflow PAT PVIF 25% PV
Year 0 -$85,000.00 -85000 1.0000 -$85,000.00
Year 1 $300,000.00 $60,000.00 $125,000.00 $115,000.00 $80,500.00 0.8000 $64,400.00
Year 2 $330,000.00 $66,000.00 $131,250.00 $132,750.00 $92,925.00 0.6400 $59,472.00
Year 3 $363,000.00 $72,600.00 $137,812.50 $152,587.50 $106,811.25 0.5120 $54,687.36
Year 4 $399,300.00 $79,860.00 $137,812.50 $181,627.50 $127,139.25 0.4100 $52,127.09
Year 5 $399,300.00 $79,860.00 $137,812.50 $181,627.50 $127,139.25 0.3280 $41,701.67
Year 5 $15,000.00 $10,500.00 0.3280 $3,444.00
NPV $190,832.13

IRR calculation

IRR calculation
Income Direct costs overheads Net cash flows PAT IRR
Year 0 -$85,000.00 -85000 105%
Year 1 $300,000.00 $60,000.00 $125,000.00 $115,000.00 $80,500.00
Year 2 $330,000.00 $66,000.00 $131,250.00 $132,750.00 $92,925.00
Year 3 $363,000.00 $72,600.00 $137,812.50 $152,587.50 $106,811.25
Year 4 $399,300.00 $79,860.00 $137,812.50 $181,627.50 $127,139.25
Year 5 $399,300.00 $79,860.00 $137,812.50 $181,627.50 $127,139.25
Year 5 $15,000.00 $10,500.00

Report on the capital expenditure analysis

In the present-day business world, capital investment is a decision that requires knowledge and a deep understanding of the situation. The main reason for this is the fact that an organization that chooses to engage in capital expenditure ties a lot of money into the project (Marcus 78). It is therefore necessary to ensure that the anticipated returns from the investment are achievable with a high degree of assurance.

This necessitates the use of capital expenditure appraisal techniques that can help the management to understand whether the intended project is financially viable or not. These indicators provide useful information to the management upon which they make well-thought-out decisions (Morgan 126). This paper presents a report for the management of Vienna Orthopedics on the financial viability of capital expenditure the company intends to pursue. The two methods used are the NPV and the IRR

NPV

Net present value is a capital investment appraisal method that entails establishing the net cash flow which is discounted using a predetermined rate of return. This method is used to appraise projects that have cash inflows over a period of time. It is therefore a desirable one since it indicates the present value of the money received at the future date hence helping to determine the financial viability of a project (Wendy and Colin 67). Using the NPV Vienna Orthopedics Pty Ltd can go ahead and implement the project since it results in a positive net present value.

IRR

This is another financial appraisal technique that establishes the rate of return that is required for the project’s NPV to be equal to zero. Using this method, if a project’s required rate of return is lower than the IRR, the project is rejected; if it is higher, the project is accepted (Modigliani 219). The higher the IRR the more acceptable it is since it indicates that it will have higher returns if the project is implemented. Using IRR, Vienna Orthopedics Pty Ltd should accept the project since the IRR is 105%.

Works Cited

Marcus, James. Modern Finance for SME. London: Prentice Hall, 2006.

Modigliani, Franco. Capital Markets: Institutions And Instruments. London: Prentice Hall, 2001.

Morgan, J. Arnold. Investment appraisal for modern day coprporate. New York: Routledge, 2001.

Wendy, Carlin and C. Meyer. Journal of Financial Economics. London: Elseiver, 2003.

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