Valuation Of Investment Property And The Urban Built †Free Sample

Question: Discuss about the Valuation Of Investment Property And The Urban Built. Answer: Calculating Net present value method and a required rate of return of 8% to determine, which project should the Company accepted: Year Project A Discounting rate PV 0 (11,000.00) 1.00 (11,000.00) 1 1,000.00 0.93 925.93 2 2,000.00 0.86 1,714.68 3 3,000.00 0.79 2,381.50 4 4,000.00 0.74 2,940.12 5 5,000.00 0.68 3,402.92 NPV 365.14 Year Project B Discounting rate PV 0 (11,000.00) 1.00 (11,000.00) 1 5,000.00 0.93 4,629.63 2 4,000.00 0.86 3,429.36 3 3,000.00 0.79 2,381.50 4 2,000.00 0.74 1,470.06 5 1,000.00 0.68 680.58 NPV 1,591.12 The overall calculation of NPV mainly helps in identifying the financial viability of the project, which could help in improving financial improvements of the company. The use of NPV valuation could helpful in detecting financial viability of the project and allow management to make adequate investment decisions. From the overall valuation of NPV the overall financial viability of Project B can be identified, as it portrays the higher net present value. However, the required rate of return of 8% mainly helps in depicting the financial performance of the project, which in turn helps in discounting the cash inflow. This discounting measure has mainly allowed the company to detect that project B could provide a NPV of 1,591.12, while project A provides 365.14 value. Hence, it could be understood that using project B would allow the firm to increase its value in future and generate high level of returns from investment. In addition, the cash flow of project B is relevantly at the levels, which help in reducing the negative impact of inflation and time value on its returns. In this context, Almarri Blackwell (2014) argued that NPV valuation mainly reduces its friction when the company does not accurately use discounting rate to evaluate financial viability of the project. Calculating payback period for each project and depicting which project should be accepted by the company: Year Project A Cum-Cashflow 0 (11,000.00) (11,000.00) 1 1,000.00 (10,000.00) 2 2,000.00 (8,000.00) 3 3,000.00 (5,000.00) 4 4,000.00 (1,000.00) 5 5,000.00 4,000.00 Payback period 4.20 Year Project B Cum-Cashflow 0 (11,000.00) (11,000.00) 1 5,000.00 (6,000.00) 2 4,000.00 (2,000.00) 3 3,000.00 1,000.00 4 2,000.00 3,000.00 5 1,000.00 4,000.00 Payback period 2.67 In addition, from the overall payback period valuation the company can identify the project, which could quickly pay its investment value. In addition, the payback period calculation mainly indicate that project B needs least years to payback the initial investment amount. However, project A mainly needs 4.2 years for paying back the initial amount, while predict B needs 2.7 years to payback the value. This relevant increment in payback period value of project B is identified from the high cash inflow, which is provided by the project. However, project A does not provide the relevant cash inflow that could provide high payback of the initial investment. Therefore, from the evaluation and restriction of the organisation, project B should be chosen, as it falls below the required of 3 years of payback period value. Baum Crosby (2014) argued that payback period does not evaluate the time value of income, which does not reduce the negative impact of inflation rate. Sketching cash inflow and outflow of different options presented by the production manager: Option 1 Particulars 2019 2020 2021 2022 2023 Sales units 60,000 65,000 70,000 80,000 90,000 Sales price 105 110 116 122 128 Cash inflow 6,300,000 7,166,250 8,103,375 9,724,050 11,486,534 Cash outflow - - (400,000) (1,200,000) (2,000,000) Total cash inflow 6,300,000 7,166,250 7,703,375 8,524,050 9,486,534 Option 2 Particulars 2018 2019 2020 2021 2022 2023 Sales units 60,000 65,000 70,000 80,000 90,000 Sales price 105 110 116 122 128 Cash inflow 6,300,000 7,166,250 8,103,375 9,724,050 11,486,534 Cost of equipment (25,000,000) Annual operating cost (3,000,000) (3,000,000) (3,000,000) (3,000,000) (3,000,000) Salvage value 2,000,000 Total cash inflow 3,300,000 4,166,250 5,103,375 6,724,050 10,486,534 Option 3 Particulars 2018 2019 2020 2021 2022 2023 Sales units 60,000 65,000 70,000 80,000 90,000 Sales price 105 110 116 122 128 Cash inflow 6,300,000 7,166,250 8,103,375 9,724,050 11,486,534 Equipment cost (35,000,000) Operating cost (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) Salvage value 10,000,000 Total cash inflow 4,300,000 5,166,250 6,103,375 7,724,050 19,486,534 Calculating net present value of different options and make recommendations for the company: Option 1 Particulars 2019 2020 2021 2022 2023 Total cash inflow 6,300,000 7,166,250 7,703,375 8,524,050 9,486,534 Discounting rate 10% NPV 29,149,885.17 Option 2 Particulars 2019 2020 2021 2022 2023 Total cash inflow 3,300,000 4,166,250 5,103,375 6,724,050 10,486,534 Discounting rate 10% NPV (3,618,647.78) Option 3 Particulars 2019 2020 2021 2022 2023 Total cash inflow 4,300,000 5,166,250 6,103,375 7,724,050 19,486,534 Discounting rate 10% NPV (4,860,490.43) From the overall evaluation of all the three options it could be identified that option 1is the most viable measure, which is been proposed by the production manager. This measure has the highest value NPV, as the outflow from the production is relatively low. In addition, the options mainly increase the overall value of investment, as cash inflow of the organisation is relatively high. The NPV value of other options is relatively negative, which indicates that the company will not get adequate return from investment. Furthermore, using option 1 could eventually help the Red Rose Company to generate high level of income from investment. Crosby Henneberry (2016) mentioned that with the help of NPV valuation adequate projects are identified, which could help in improving financial performance of the company. In this context, Gotze, Northcott Schuster (2016) further stated that discounting rate are mainly the required rate of minimum return, which is needed by the company to grow its capital. Allocating joint cost of the two products soda and chlorine with the help of sales value at split off method: Allocation for Joint costs using sales value of Splitoff Method Soda Chlorine/Basalt Total Sales value of total production at splitoff cost 75,000.00 150,000.00 225,000.00 Weights 0.33 0.67 Joint cost allocated 666,666.67 1,333,333.33 2,000,000.00 Allocating joint cost of the two products soda and chlorine with the help of physical measure method: Allocation of Joint costs using physical-measure method Soda Chlorine/Basalt Total Physical measure of total production 1,500 1,000 2,500 Weights 0.6 0.4 Joint cost allocated 1,200,000 800,000 2,000,000 Allocating joint cost of the two products soda and chlorine with the help of net realizable method: Allocation of cost using net realizable value method Soda Basalt Total Final sales value of total production during accounting period 75,000.00 250,000,000.00 250,075,000.00 Deducting separable cost - 90,000.00 90,000.00 Net realisable value at splitoff point 75,000.00 249,910,000.00 249,985,000.00 Weights 0.00 1.00 Joint cost allocated 600.04 1,999,399.96 2,000,000.00 Depicting the gross margin for each product under each of the three methods: Gross profit margin of soda Sales value at split off Physical measure NRV Revenue 75,000.00 75,000.00 75,000.00 Cost of goods sold 666,666.67 1,200,000.00 600.04 Gross margin (591,666.67) (1,125,000.00) 74,399.96 Gross margin percentage -788.9% -1500.0% 99.2% Gross profit margin of Basalt Sales value at split off Physical measure NRV Revenue 250,000,000.00 250,000,000.00 250,000,000.00 Joint cost 1,333,333.33 800,000.00 1,999,399.96 Separable cost 90,000.00 90,000.00 90,000.00 Gross margin 248,576,666.67 249,110,000.00 247,910,600.04 Gross margin percentage 99.431% 99.644% 99.164% From the overall valuation of above measure adequate gross profit margin of both the product can be identified. 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