PROJECT ASPIRE AND PROJECT WOLF

In these cases, the NPV helps in determining the worth of a project, investment, or any series of cash flows. It is an all-inclusive tool of evaluation, as it accounts for all the revenues, capital costs, and expenses associated with investments. In addition to taking into account all the revenues and costs, the NPV also factors the timing of all cash flows that have the potential of largely impacting on the present value of investments (Magni 2009, p. In the case of AYR Co. , the NPV is used to make a financial decision on which project to invest in between “Wolf” and “Aspire. 82 Year 2 613,942 (1. 08 Year 3 645,310. 39 Year 4 895,718. 77 Year 5 414,394. 34 Total present value of cash flows = 2,423,497. 47 Year 5 678,073. 13 Total present value of cash flows = 2,570,990. 74 NPV = Cash Inflows – Cash Outflows NPV = 2,570,990.

74 a. Calculation of Internal Rate of Return (IRR) AYR Co. 09 years For project “Wolf”, the payback period is: Payback period = 4 + (100,039. 04 years QUESTION 2: ANALYSIS AND EVALUATION OF THE INVESTMENT PROJECT OPTIONS AS FOLLOWS: i. A recommendation regarding the project to undertake The recommended project that AYR Co. should implement is project “Wolf. ” ii. As earlier defined, the IRR is the discount rate that makes the NPV zero. Like the process of calculating the NPV, the IRR also starts by identifying all the cash outflows and the inflows. Nonetheless, rather than depending on external data such as discount rate, the IRR exclusively relies on the outflows and inflows from the project (Magni 2010, p. Following the IRR rule, an investment or project is worthy for investment when its IRR is higher than the hurdle rate.

Depending on the application, the hurdle rate often refers to the weighted average cost of capital. However, the IRR has a weakness in that; it fails to assess the financial impact on a company; all that it demands is meeting a minimum rate of return. Since the IRR and NPV metrics rank the two alternative projects differently, it is necessary to exploit the strengths of the methods, taking into account the company needs. By the IRR rule, project Aspire is recommended, and by the NPV rule, project Wolf is recommended. According to Dennis and Sibilkov (2009, p. 249), when the two methods are inconsistent, the convention is to use the Net Present Value because it better reflects a company’s primary goal of growing the financial wealth.

Although the payback period can be used to make the investment decision between the two projects, the method is limited in various ways. For instance, the method is strictly limited to the years it takes to earn back the initial outlay. In this way, after the project has reached its payback period, the metric does not account for profitability. Furthermore, the payback period has a weakness in the way it does not account for the time value of money. Therefore, the Net Present Values is still the best metric in making an investment decision between project Aspire and project Wolf. should integrate the business environment factors into the decision-making process. QUESTION 3: A DISCUSSION OF THE TWO SOURCES OF FINANCE BEING CONSIDERED BY THE BOARD OF AYR CO.

YOUR REPORT SHOULD INCLUDE: i. A Description of Debt and Equity When a firm needs money, there three main ways to get financing, which areDebt, equity, or some hybrid of the two. In the case of AYR Co. Usually, a long-term loan needs to be secured by the assets to be purchased. Short-term debt financing, on the other hand, entails a company’s need to finance the daily operations of the business like buying supplies, inventories, or paying employees’ wages. This type of financing is often known as short-term loan or operating loan because the future payments are required within less than 12 months (Gompers & Lerner 2010, p. However, in the case of AYR Co. , the type of debt financing required to undertake the projects is long-term debt.

However, giving away part of the company’s ownership also means giving up decision-making power, which is often not a good thing for the company. It also takes a long time to get equity financing (Gompers & Lerner 2010, p. Debt financing has advantages over equity financing in that the financing does not reduce the owner’s ownership interest in the firm. Also, with debt financing, the investor does not have a direct claim on the profits that the company makes in future; which is an advantage for the company. However, debt financing is disadvantageous for various reasons, including for the fact that debt must at some point be repaid, even if the business fails. The WACC is the average after-tax cost of a firm’s sources of capital, such as bonds, preferred stock, and common stock.

Its calculation entails multiplying the cost of each source of capital by its relevant weight and then adding the products to establish the WACC value (Pricing & Tribunal 2012, p. Compared to AYR Co. ’s equity financing, the company’s long-term debt is a cheaper source of financing. This means that the company can get long-term debt financing more cheaply. goes bankrupt, the stockholders become the last to be paid retribution, if there is any (Pricing & Tribunal 2012, p. The selected source of financing should be manageable to enable the company to earn adequate return to satisfy its current shareholders, lenders, and other investors. The company’s ability to manage the current financing appeals to potential shareholders and creditors, who may make decisions to invest in the company.