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Finance analysis - Essay Example
Author : magalihowell
Finance & Accounting
Pages 4 (1004 words)
Finance Analysis Table of Contents Introduction 3 Research on Model Design 3 Capital Budgeting Model and the explanation of the Outputs 4 Conclusion 6 References 7 Introduction Capital Budgeting plays a crucial role in the business decisions of organizations…
In this study, it was required to compute the Net Present Value of a project for a given company and make a recommendation on whether the project is worthwhile or not. The NPV of a project is the difference between the present values of its cash inflows and its cash outlays. The NPV technique makes use of the discounted cash flow method and discounts the cash flows at the rate of the cost of capital (Smart & Megginson, 2008, p. 261). Additionally, this paper includes designing a capital budgeting model that can be used to evaluated similar projects. Research on Model Design The conventional use of financial models is to evaluate the financial feasibility of a proposed investment. Such models can be utilized to investigate the various investment alternatives that are available, in order to choose the most viable one. Generally financial models are designed to assess a particular capital budgeting project. Capital budgeting choices are supposed to be based on cash flows, instead of accounting profits. Additionally it is the incremental cash flows that are applicable. In general, a project is undertaken if the NPV of the incremental cash flows generated from it is found to be positive. However, there may be instances when a Company has multiple projects to choose from but due to budget constraint, the firm’s management might not be able to select all the projects that have a positive NPV. ...