Simulated Financial Analysis

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Date Submitted: 01/21/2011 07:28 PM

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Part 1 Which supplier should AusGrocers choose and why?

1.1 Introduction A managerial tool, otherwise commonly known as Capital Budgeting, is needed for an investment decision-making with the most optimum cash flows and rates of return.(Frino et al, 2006) The analysis is a sound procedure of making evaluation and comparison by taking account of all the relevant cash inflows, outflows and the revenues and expenses. It seems best appropriate to formulate a decision using the Net Present Value (NPV) investment evaluation technique. NPV is the mainstream technique followed by payback and real options techniques in evaluating projects in Australian Capital Budgeting. (Truong, Patrington and Peat 2005) In the NPV approach, the value of a project in present time by discounting all estimated cash inflows and outflows over the life time of the project, using an appropriate discount rate.(Willigers and Hansen 2008). Under this analysis, it can be determined whether or not the expected benefits from an investment project override the project's cost.( Frino et al, 2006) Also a final choice as to the acceptance of the most optimal project among a set of available alternatives can be made (i.e. a project with a higher NPV).

1.2 Investment analysis - calculation 1.2.1 What to include cash flows

All the expected (and relevant) cash inflows and outflows can be broadly categorized into three components as follows:

(1) Fixed Capital Investment (=Initial Capital Outlay) (2) Free Cash Flows = EBDIT – (Taxable Income x Corporate Tax Rate) (3) Salvage Value...