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Essentials of corporate financial management - Coursework Example

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Essentials of corporate financial management

In addition, the tool can easily be modified to reflect updated information or changes in perceived risk, this is done by amending either the cash flows used or using an alternative discount rate. NPV however, is not without its problems. While the method is easily understood by those with an accounting background, a positive NPV leading to the acceptance of a project and a negative NPV a rejection. The actual calculations can be difficult to explain to a non-financial manager, the method can also be time consuming to set up in the first place. As such, the client may choose to use alternative methods including payback period or internal rate of return (IRR). Payback period is tool which gives a simple approximation of the length of time a project will take to pay back based upon an undiscounted cash flow. As such, the tool is easily explained to the non-financial manager but can be seen as oversimplified, not taking into account the time value of money (Arnold, 2007, Tennentt 2008). IRR on the other hand is similar to NPV in that the tool works with discounted cash flows however, instead of delivering a bottom line return on the project, the tool returns a return as a percentage in relation to the discount rate used. As such, this can be an appealing way of presenting financial information to managers who are used to dealing with percentages and other forms of sales data. Despite the use of these tools for the purposes of financial evaluation, it may be of greater importance for the client to consider qualitative data in relation to potential projects as well as the financial data. For instance, the client may consider the marketing benefits associated with the project which could be used to drive a clear message of the company’s commitments to the community and the wider social environment. In addition, the client also needs to be careful to consider the nature of the assumptions used in the building of any financial models. For instance, an assumption has been made that the cost of particle acquisition has been guaranteed by contract at ?3.50 per tonne for the next five years. However, the client should consider various scenarios such as the liquidation of the supplier and the then changed cost of acquiring the raw material in such an environment. As such, it may be stated that the validity of any financial modelling is only as good as the information from which the model is built. As such, while the clients NPV methodology is a good one in conducting a project appraisal, the client should also consider conducting a number of other forms of analysis alongside this, including payback period, IRR and qualitative analysis. A sample payback period, NPV and IRR have been provided in appendix one with the following results: NPV: ?3,847,144 – Accept Project IRR: 79.93% - Accept Project Payback period – Within 2 years Client 2 In the scenario presented, the client is left with two major options for the funding of any future expansions, namely long term debt funding through bonds and long term equity funding through the issue of new share capital. In addition, the client may consider a hybrid option issuing both long term debt and equity to fund future growth. In making any decision, one of the prime considerations of any financing exercise is to consider the cost of finance. In general terms, the cost of debt is seen in the literature as having a generally lower ...Show more

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XXXX XXXX Subject: Accounting Consultancy Date: 19/10/11 Accounting Consultancy Client 1 In the first instance, the client is considering using net present value (NPV) as the basis for assessing the merits of the current project…
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