# Sara's Cake Company Financial Analysis

910 Words4 Pages
An offer to open a satellite bakery at a grocery store location is a great business incentive for a small cake company as trends indicate that 10 percent of all manufacturing shipments are attributed to in store bakery chains. Sara’s Cake Company has a unique opportunity to increase revenues based on the trends reported by the U.S. Department of Commerce for the food industry. “Successful in-store bakery chains have to be skillful in adjusting production techniques to be more efficient and cost effective without affecting the quality of the product” (Khaled & Mapa, 2012). Robust analytical measures help to determine the feasibility of investments by calculating the time value of money. Money available now is worth more than the same amount…show more content…
Within the capital budgeting scope, net present value is used to analyze projected investments and projects to determine profitability. Financial consulting for Sara’s Cake Company will require the measurement of projected earnings generated by the cake company in an effort to determine if the investment is profitable one. Investments in which conclude a positive net present value are deemed profitable in which dictate the investment can be made. Many challenges consist when evaluating a future investment so different levels of measurement are typically required, as net present value becomes the additional tool used in the analysis. Net present value has the component of discount rate in which can determine the expected rates of returns by identifying costs related to financing the investment. The method of valuation is calculated by discounting future net cash flows from the investment of the projects required rate of return. The initial amount of the investment and then subtracted in the calculation. The formula is expressed below: The internal rate of return (IRR) is a vital resource within the capital budgeting process as it is an important phase in the evaluation scope. The internal rate of return is used in the assessment of potential investment profitability. Financial consulting for Sara’s Cake Company will include…show more content…
= -\$25,000 + 18000/0.06 + 18000/0.06 + 18000/0.06 + 18000/0.06 +18000/0.06 = \$50,822.55 NPV Pursuing this project would be optimal with a positive NPV of \$50,822.55. PV Expected Cash Flows \$75,822.55 Calculate Internal Rate of Return 0= -\$25,000 +(\$18,000)/(1+.6635)+(18,000)/(1+.6635)+(\$18,000)/(1+.6635)+(\$18,000)/(1+.6635/ (\$18,000) = 66.35% Internal Rate of Return is 66.35% This investment opportunity for Sara’s Cake Company is positive as cash flow and net present values indicate a return greater than the initial investment of \$25,000. Although the project offers a positive NPV, the cash flows are still estimates. The accuracy of these projected figures also depends on experience and skills of the financial