Analysis of the Q-power Boat Project

The report has analyzed the proposed investment projects that should be undertaken by Pentag company to replace the current business product. The company has two possible projects that is to produce modern water boats to replace the current boat type that is said to emit a lot of carbon to the water and environment. The expected cash flow for the two projects (Q-power boat) and the (S-power boat) are presented in the cash flow statements labeled table 1.1 and 1.2 respectively. The cash flow are subject to the assumptions made to prevail in the market demand for the proposed boat models. The analysis shows that the Q-power boat model will have a higher net present value over the S-power boat model. This is an implication that the firm will opt to invest in the Q-power model over the S-power model. For environmental issues, the S-power model is advocated for by the environmental conservation agency as the suitable model to replace the current boat model but on the financial analysis, it indicates that the firm should select the Q-power model as it will deliver higher return due to its higher net present value (NPV). The sections below will review a critical analysis of the projects and deliver summary and recommendation. As the firm undertakes project evaluation, both quantitative and qualitative aspect should be considered as the influence project performance. A project with less profitable cash flows may be selected at the expense of a more profitable project as it will solve a more complex problem like environmental pollution or a social problem that its benefits may not be valued in the monetary terms or that its positive impacts may not be felt in short term but in the long run it it will be more profitable that the short term benefits from the forgone projects

1.1 Q-power Boat Model

The project to be undertaken can be evaluated by use of different techniques but the the most suitable method to evaluate more technical and scientific projects is the one that was developed in 1967 that looks into key quantitative and qualitative fundamentals (RFBR,2012). This method evaluates projects based on the technical level requirement and the enterprise resource available to be committed to the project. The fundamental elements of the project can be classified into: technical and scientific production process, market structure, macroeconomic factors, environmental factors, and social factors that should be critically analyzed before the project is implemented (Yakovlev,2015). The cost effectiveness of the project should be critically evaluated whereby the ratio of budget cost effectiveness of the project to be selected should be the driving force in selection of the project to be implemented (Korolev, 2015). The higher the benefit over the cost to be incurred in the implementation of the project, the higher the chance of committing the entity’s funds in the project. The key factors that should be looked into in project evaluation includes: quality of feasibility study, the risk exposure to the project, the expected period for project implementation, competitive of the firm resources, the technical viability, information accessibility to the decision makers, and the nature of the problem to be solved by the implementation of the project (RF Committee, 2015). A project may not be highly profitable but because of the nature of the problem that will be solved by the project may lead to the selection of the project over more profitable projects and less costly projects. Key factors like environmental issues and social factors should be at the centre of decision making pertaining selection of a number of problems to be implemented as the project might create a social or environmental problem that its compliance cost might be higher for the firm.

 The Q-power boat model is one of the proposed boat model to replace the current boat due to high level of carbon emission experienced from the current boat. The projected income statement for the project is given in the table 1.1 below:

Table 1.1: Budgeted Income Statement for the Q-power project

From the table 1.1 above, the model is expected to have a total demand in units 4650 for the 6 years and each product will be selling at 30,000 that will give total revenue of 13,950,000. The demand for the model is expected to have an annual increment of 50 for the six years. The average sale for the five years is expected to be 23,250,000 with a minimum sale occurring in the firm year of launch. The project will need an initial plant installation and additional cost of 500,000 that will cater for the new project. The contribution for the project will be 84,900,000 (171,846 per unit). The net profit for the project for the 6 year is projected to be 60,648,000 for this makes the project to have a net present value (NPV) of 2,982,500.02. the project is expected to increase the current sale by 500,000 per year that translates to 3,000,000 for the 6 years the project is expected to run. At the same time the project will lead to reduction in the current sale of the existing model by 10,000 which translates to 600,000 for the six years of operations

On the qualitative aspect, the Q-power is taken to be an environmental friendly compared to the existing model that is emitting high carbon compounds. If the model gets accepted in the market, it will facilitate the mitigation of on the emission of carbon into waters. It is the social responsibility of every corporate to provide products that promotes the sustainability of the environment as it is taken to be part of the environment. The project is taken as an initiative process to lead to environmental conservation and it will put the corporate on the map of environmentalist and thus good public image. The major change is that the technological applications have not been tested and its operation tested that will create the risk of abandoning the current model in favor of the proposed model. The production staff will need retraining and the cost associated to the project has not been incorporated into the analysis. New technological applications will be required that needs rights on the software and its maintenance.

1.2 S-Power Model Project

The S-power project model is another alternative investment project that Petang company can undertake as an alternative boat to the current model produced by the company. The S-power model is considered as the most efficient in reduced emission of carbon compared to the Q-power model. The expected cash flow from the project is provided in the figure 1.2 below:

Table 1.2: Cash flow statement for S-power Project

From the table 1.2 above on the projected cash flow for the S-power boat model, it can be seen that the model is expected to yield a total of 50,700,000 cash flow for the 6 years that gives a net present value of 2,002,097. The project can be taken as viable as it provides a positive net present value. The cash flow for the project has an increasing trend over the years. On the qualitative factors, the project is considered to be the most suitable as it will have minimal environmental effects due to less emission of carbon into water. The environmental agency is persuading the management to select the project as it considers it as the best solution to the current carbon emission.

1.3 Conclusion and Recommendations

From the analysis above both projects can be classified as profitable since the provide a positive net present return over the period of six years. If the firm only considers the financial aspect, the Q-power project will be given the first priority since it has higher return that the S-power project. The S-power project is the best project on the qualitative aspect as it is proposed to be having less emission of carbon compounds into water and the environment. The extend of the environmental damage that the project will have to the eminent should be evaluated at the upfront of projection selection as the compliance cost associated to the damage will affect the future value of the firm. It is the responsibility of every individual and firm to protect the surrounding and put in place proper mechanisms to mitigate any negative effects associated to their products and firm operations. In the modern corporate environment, the performance of the firm is not based on the return on its assets, wealth created under its operation or the ability of the firm in maximization of the shareholders’ value but rather based on how the firm adds value to the environment it operates that is considering the interest of the stakeholders including the general public.

References

D. Yakovlev, A. Pryakhin S. Korolev, Y. Shaltaeva, N. Samotaev, E. Yushkov, Engineering    competitive education using modern network technologies in the NRNU MEPhI, in                   Proceedings of the 2015 IEEE Workshop on Environmental, Energy, and Structural            Monitoring Systems, EESMS 2015

Guidelines for integrated assessment of the efficiency of measures aimed at accelerating             scientific and technical progress, in SCST Decree of the USSR Presidium (March 3,         1988), No. 60/52. Available at https://www.lawmix.ru/sssr/56905

 Methodical recommendations for estimation of effectiveness of investment projects (Ministry of     Economy, Ministry of Finance, Gosstroy of the Russian Federation (N VK 477, 1999).      Available at: http://www.zakonprost.ru/content/base/77305

Procedure for forming, financing and implementing innovative ST programs and projects of the

            RF State Committee for Higher Education, Normative-methodical materials (Moscow,        1996) Conditions for competition and application requirements. Economic research     contest “Spring 2015”, see the website of the consortium for economic research and educationhttp://www.eercnetwork.com/default/download/creater/how_to_apply/file/8f5cc            0b81dcd59a7f8076845326f75b07846994d.pdf (date of access: 17.03.2016)

Regulations on examination procedure of RFBR competitions in Decision of the RFBR Bureau            of the Board (May 17, 2012). Available at: rfbr.ru ICNRP-2016 IOP Publishing IOP           Conf. Series: Journal of Physics: Conf. Series 781 (2017) 012057 doi:10.1088/1742-      6596/781/1/0120576

Appendices:

I) Budgeted cash flow statement (Excel Extract)

PENTAG COMPANY

Q-POWER BUDGETED INCOME STATEMENT

YEAR

1

2

3

4

5

6

TOTAL

SALES UNITS

650

700

750

800

850

900

4650

SELLING PRICE/ UNIT

30,000

30,000

30,000

30,000

30,000

30,000

180,000

TOTAL SALES

19500000

21000000

22500000

24000000

25500000

27000000

FALSE

VARIABLE COST

7800000

8400000

9000000

8400000

10200000

10800000

54600000

CONTRIBUTION

11700000

12600000

13500000

15600000

15300000

16200000

84900000

FACTORY FIXED O/H

200000

200000

200000

200000

200000

200000

1200000

NET PROFIT

11500000

12400000

13300000

15400000

15100000

16000000

83700000

SALES INCREAMENT

500000

500000

500000

500000

500000

500000

3000000

LESS DISCONTINUED LOSS

10000

10000

10000

10000

10000

10000

60000

NET COMPRESSIVE INCOME

11990000

12890000

13790000

15890000

15590000

16490000

86640000

INCOME TAX

3597000

3867000

4137000

4767000

4677000

4947000

25992000

INCOME AFTER TAX

8393000

9023000

9653000

11123000

10913000

11543000

60648000

PV (20%)

994,166.67

429,666.67

459,666.67

529,666.67

519,666.67

549,666.67

3,482,500.02

INITIAL INVESTMENT

500,000

2,982,500.02

NPV

II)

PENTAG COMPANY

S-POWER PROJECT

PROJECTED INCOME STATEMENT

YEAR

1

2

3

4

5

6

TOTAL

CASH FLOWS

6400000

7400000

7900000

8600000

9300000

11100000

50700000

PV

304761

352380.95

394957.35

429997.79

464999.89

554999.99

2502096.97

INVESTEMNTS

500,000

NPV

2,002,097