Managerial Economics

This paper presents an analysis of a project to be undertaken by Apex, a firm in the manufacturing industry. The firm is desirous of introducing packaging of some of its products as a diversification of its business activities strategy. There is however uncertainty regarding the viability of the envisaged project. In any investment appraisal decision or project, it is advisable that the project is first appraised before the implementation or execution of the project (Pratt & Reilly, 2000).

To undertake appraisal of the project, some particular details are required. The life of the project is to be determined, the costs associated with the project, the time intervals when they are to be incurred and the revenues accruing from the project and the periods upon which such revenues become due. The interest rate to be adopted is also to be determined. This represents the cost of funds to the investor or the return sought from the investment.

In the subject case, the life of the project has been projected to be five years. The initial capital outlay has been provided at $ 20 million. The incomes have also been provided after each year. The rate of depreciation, and the tax regime too have been given at 35%. The discount rate adopted is 20%, being the rate previously used. In the computation of the Net Present Value of the project, valuation methods were used. The future sums were discounted at a rate of 20% for the specific period respectively. This gave the Net Present Value and thereby the worth of the project.  

The calculations were done as hereby explained. The gross margin was given at 50%. To obtain the gross profit, a 50% value of the sales was thereby computed. The taxable amount was also attained by deducting $ 40,000, the annual depreciation, and the operating costs from the gross profit to obtain the net taxable amount. This amount less tax gave the Net Operating Income. These amounts when discounted produced the Net Present Value. The summation of the NPVs gave rise to the Total NPV. The difference of this answer with the initial capital outlay presents the worth of the project.

From the calculations, the NPV of the project is $ 1,243,425. This implies that the project would improve the incomes accruing to the firm. The project should therefore be implemented since it earns a return to the investors. The project can therefore be observed to maximize the value of the firm and thereby the need to invest in it. it is therefore evident from the above calculations and the discussion that investment appraisal is important in decision making. It helps to make sound decisions based on factual information and thereby preventing loss resources in projects that are not feasible (Varshney, 2010).    

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