Principles of Finance Essay Example | Topics and Well Written Essays - 1750 words

Principles of Finance - Essay Example According to the paper the total cost of a project consists of cost of capital, assets, labor expenses, intermediate resources, staff salaries and production expenses among others. Costs can be in different forms, such as real, nominal, primary, secondary, associated expenses and project expenses among others. Hence, while appraising the equipment and facilities manufactured by Danforth Limited and Donnalley Limited, one would have to compute as well as compare the costs involved in both of them. The product of the company that involves relatively less expenses should be chosen over the other.  This discussion stresses that if the scenario is such that the rejection of Dynamo project by Radiant Laundry would lead to the introduction of an identical product by a direct rival, then Radiant Laundry should take a decision on it on the basis of a time period more than 10 years. This is because this project is not viable when considered for a period of around 10 years. Moreover, another imperative point to be considered by Radiant Laundry is the redundant effect the rival’s product would have on its sales figure. If the introduction of a similar product by a direct rival dose not hampers the sales of Radiant to a large extent, then the company should avoid taking up the Dynamo project.  The following segment of the paper focuses on the sensitivity analysis of the project’s NPV on to annual net cash flows and cost of capital individually.... Additionally it has been ascertained that the estimated salvage value of the facility after 10 years would be equivalent to $80,000, which is much higher than that of Dansforth Limited’s equipment. Furthermore, the economic life of Danforth Limited’s equipment facility is only 5 years while that of Donnalley Limited is 10 years. This implies that during the 10 years time frame, the total cost involved with the purchase of equipment from Danforth Limited would be doubled. Consequently, the total costs over the project life of 10 years for Danforth Limited would be more than that of Donnalley Limited by $2 million. Hence it would be advisable for Radiant Laundry Products Company to purchase the specialised equipment and packaging facilities from Donnalley Limited. Analysis of Cash Flow Capital budgeting choices are supposed to be based on cash flows, instead of accounting profits. Additionally it is the incremental cash flows that are applicable (Broyles, 2003; Polimeni & Et. Al., 1994). Thus, we would compute the additional cash flow that Radiant Limited expects to generate if it implements the Dynamo project. The components for the computation of cash flow for the Dynamo Project are as follows: Investment for test marketing = $1,500,000 Cost of Equipment= $2,000,000 Total Initial Investment = $3,500,000, Cost of funds: 15% Salvage value = $80,000 Economic life= 10 Depreciation per year (at the rate of 30% on the reducing balance basis) Year Rate Value of Equipment Depreciation 1 30% 2000000 600000 2 1400000 420000 3 980000 294000 4 686000 205800 5 480200 144060 6 336140 100842 7 235298 70589.4 8 164708.6 49412.6 9 115296.0 34588.8 10 80707.2 24212.2