Business Analysis
TFIN501 Corporate Finance

Student ID: 20137163
Name: Yuqi Wang

Summary
By calculating Net Present Value, Internal rate of return, Accounting rate of return, Profitability Index and payback period in this business analysis, it is demonstrated that weather this project is worth investing money or not.
NPV

(Table 1)
Formula:

Note: 1. According to the taxation law, most business expenses can be deductions to reduce the assessable income such as depreciation expense, interest expense, bank fee, rental fee, operation cost, advertising expense and website fee (Business Victoria, 2013). 2. Website expense is considered as a management fee rather than capital fee. Therefore, it is deductible as well (Robin, etc.2012). 3. Discount Rate = WACC – Risk premium rate = 7% - 2% = 5%
Result:
As NPV=521.73 >0, proposal is accepted.
IRR

(Table 2) – based on Table 1

Formula:

Note:
Data is based on table 1.
Result:
As IRR is compared to the required return and IRR = 7.16% > 7%, proposal is accepted.
ARR

(Table 3)
Formula:
1. Average Net Profit/Average Book Value 2. Average Book Value = (Initial Investment + Salvage Value)/2 Initial Investment | Salvage Value | 2000.00 | 0 | 3000.00 | | 12000.00 | | 17000.00 | 0 | | | Average Book Value | 8500 | Average Net Profit | 1197.35 | ARR | 0.140864706 |
Note:
1. As ARR is calculated according to the accounting cash flow, extra depreciation expense need to be subtracted.
Result:
ARR = 14% > 7%. Proposal is accepted.
Profitability Index
Formula:

PV of Cashflow | 11784.73 | Initial Outlay | 11263.00 | Profitability Index | 1.05 |

Note:
Data is based on table 1.
Result:
As accept if benefit–cost ratio > 1, profitability index = 1.05 > 1, then proposal is accepted.
Payback period

(Table 4) – based on