ASS#3 CAPITAL BUDGETING

    Step 2

As a leading Australian manufacturer, supplier of branded frozen food company, Patties Foods Limited has provided different kinds of frozen fruit pies, frozen berries, meat pies, beef sausage rolls, baked goods and pre-made desserts.

Patties Foods has developed a capital investment decision. For the decision, we considered the two options of two different types of beef pies. The first option is R&D Real Chunky Steak Pies and this product is genuinely high quality chunky pie that satisfies with tender chunks of steak encased in pastry. The second option is Herbert Adams 8-hour Slow Cooked premium pies. This product is our 8hr Slow-Cooked Collection is the ultimate gourmet chunky pie, winning silver at the 2014 Great Aussie Pie competition.

In the table below I have calculated the original cost, expected future selling price, estimated life, payback period, NPV, IRR, the estimated future cash flows and cumulative cash flows for each investment option. Also, I have chosen the discount rate of 10% to determine the NPV and IRR formulas easily.

Patties Foods Limited	Option 1: R&D  Real Chunky Steak Pies	Option 2: Herbert Adams 8-hour Slow Cooked premium pies
Original Cost	$300,000	$190,000
Expected Future Selling Price	$550,000	$400,000
Estimated Life	8 years	10 years
Payback Period	4 years	4.02 years
NPV	$75,065.17	$136,064.41
IRR	17%	24%

Payback Period

Option 1: R&D  Real Chunky Steak Pies
	Estimated Future Cash Flows	Cumulative Cash Flows
Year 1	$65,000	$65,000
Year 2	$80,000	$145,000
Year 3	$71,000	$216,000
Year 4	$58,000	$274,000
Year 5	$90,000	$364,000
Year 6	$44,000	$ 408,000
Year 7	$73,000	$481,000
Year 8	$83,000	$564,000
Option 2: Herbert Adams 8-hour Slow Cooked premium pies
	Estimated Future Cash Flows	Cumulative Cash Flows
Year 1	$34,000	$34,000
Year 2	$59,000	$93,000
Year 3	$48,000	$141,000
Year 4	$45,000	$186,000
Year 5	$99,000	$285,000
Year 6	$70,000	$ 355,000
Year 7	$29,000	$384,000
Year 8	$50,000	$434,000
Year 9	$38,000	$472,000
Year 10	$63,000	$535,000

It is really important to consider NPV (Net Present Value) and IRR (Internal Rate of Return) to make the capital investment option because NPV and IRR are effectively used in capital budgeting to analyse the profitability of the company’s investment.

According to the result of the calculation, the amount of NPV had larger positive value in the option 2. The NPV of the option 2 had $136,064.41 and the option 1 had $75,065.17. It is higher 60,999.24 than the option 1. For this reason, the option 2 will be better option to fulfill a positive cash flow in the future. Also, the first option had 17% and the second option had 24% of IRR by calculating the IRR. The second option had once again positive IRR rate.

I have decided that the second option will be the better option for Patties Foods Limited because the second option had positive results both NPV and IRR. The positive financial amounts can lead to Patties Foods Limited’s a positive financial position in the future. As a result, the second option will be the most beneficial capital investment in Patties Foods Company.