Capital Budgeting Report
Summary
Taking into account the increasing needs for fueling elements such as iron ore and the growth of industries in different parts of the world, it is inevitable that most companies must develop better channels through which such initiatives can be furthered for the general good of the public. The recent report documents the need for Blue Mountain Mining Ltd to undertake a comprehensive purchase of more trains to help in the transportation of iron ore to the industrial processing plant. The company is undertaking a comprehensive assessment of whether to introduce autonomous trains as the locomotive channels of transport over the traditional non- autonomous trains that are currently in use.
Methodology
This report adopts the use of cash flow analysis as the primary basis for the assessment of the contract volumes of iron ore transportation by the locomotives and the sales outcome based on the overall transaction cost formulated. This report suggests that the use of Net Present Value to determine the overall project profitability will be crucial. Under the Net Present Value analysis between the automation and non- automation transport framework for Blue Mountain Mining Ltd, the capital budgeting analysis of the excel reveals costs and profitability margins (Ross, 2014). The Net Present Value of the iron ore mines after the deductions of the tax and discount accumulated is $21,900,000 and this is the value that used for the computation of the cost and benefits that accrue to both proposed automated and non-automated transport system. WACC connotes the existing return on the investments and the risk for the automation process is much higher as connoted by the negative return value (Ross, 2014). The discounted rate of return for the automation process is much higher as compared to non- automation since the first years of investment must be projected as against the depreciation rate of locomotives for the fifteen year duration. The importance of the adoption of NPV in this report analysis is that it offers the opportunity for assessment of the accuracy of the projected income of the project and profitability ratio for the estimated mine duration of thirty years.
Recommendation
The projection for the starting year of investment demonstrates that the non- automation of locomotives has a higher profitability ratio as compared to the process of automation. However, this analysis suggests that the depreciation rate of non- automation is higher and the computation of the thirty year mining duration will render the project more costly as compared to automated trains (Ross, 2014). The length of the project duration is could prove favorable as an increase on the Net Present Value for the process of automation as seen in the decline in the overall operational cost for this option. It is on this basis that this analysis offers a further suggestion that the Blue Mountain Mining Ltd should consider the automation of the locomotives on a serious basis for ease of future operations for the company. This report suggests that the process of determination of the capital of the two projects requires a comprehensive assessment of cash flow under which the cost and profitability of the two ventures are analyzed. This suggestion for the automation is highly sensitive to the discount rate and is projected at 12% per annum since the locomotives under non-automation have a higher rate of depreciation over the fifteen year budgetary span (Ross, 2014).s
Limitation
The limitation of the cash flow method under this report is that it makes critical assumptions that include the fact that the inflows of cash amount to the incomes accruable on the project during the mines lifetime of thirty years. Moreover, the estimates may be an overall projection which does not take into consideration the value of depreciation of the productive assets like the trains or the locomotives within the accuracy levels required.
References
Ross, SA. (2014). Fundamentals of Corporate Finance. McGraw- Hill, Australia.
