In this report, “The Popularity of Financial Ratios in Multivariate Modeling” the author will advise NENE limited on various projects they are hoping to take up. Different appraisal methods will be used including NPV, ARR, Cash flow and Payback period methods…
In six years’ time, it has a higher positive cash flow level of £105 as compared to the Beta of £83.
The ARR for Alpha is higher than that for Beta at 29.4% while that of Beta is at 1.6%. This is an indication of the viability of the project to perform as expected when acquired. As such the business assets for Alpha are increasing at a higher rate than for the Beta. The rate of ARR for Alpha is an indication of the expected rates of return on the value of the assets for is higher (Robb & Robinson, 2012). The NPV of Alpha is also higher than that of Beta. It indicates that project Alpha will increase the shareholder’s equity more than project Beta. For all these reasons, it is advisable that NENE should choose project Alpha.
Internal Rate of Return is the method that gives the investors an easy way of estimating the quantity or rate of return that an investment is expected to offer. This is usually the discount rate in which the Net Present Value of the expected cash flows is equal to zero. The method can be calculated through a trial and error method, where the discount rate will be varied until we find where the NPV = 0 (Balmer, 2001). Through a general rule, the IRR with an NPV which is greater than zero is usually preferred. This method also advises that all the IRRs with values higher than the opportunity cost of capital of the project should always be accepted.
While using this method, one is able to estimate the return on the initial invested amount. The method is also easy to use as its calculations are not very complex. The method also provides a clear and easy way of comparing the projects to come up with the most preferred.
Cite this document
(“The Popularity of Financial Ratios in Multivariate Modeling Essay”, n.d.)
Retrieved from https://studentshare.net/finance-accounting/758666-case-study-02246
(The Popularity of Financial Ratios in Multivariate Modeling Essay)
“The Popularity of Financial Ratios in Multivariate Modeling Essay”, n.d. https://studentshare.net/finance-accounting/758666-case-study-02246.
The financial ratio helps to find out the performance of the firm over the years and its state of affairs. It used to analyze the functional effectiveness of the firm comparing with the competing firms. Financial ratios help to compute various financial statements and formulate new business-investment policies or to arrive at any management decision.
Finance and Accounting
Ratio analysis is a useful tool for analyzing a company, to predict about its future, but the result might get wrong if the factors of the variables are not taken in consideration. LEV and Sunder (1979) raised some basic questions like the structural relationship of the analyzed firms, the size of the firm; these factors are taken in consideration or not.
But this is not to say that financial modeling cannot be performed manually.There are various financial models that a company can use in evaluating its investment projects. The only challenge for the company is to identify the model that will provide the most accurate information that can help the company make the right decision.
Then, key assumptions and author’s analysis method are presented. The latter part of the paper will explain and critique the financial position of the two companies and also the strategy and structure of the organisation. For this purpose different financial
strates a company’s ability to pay off its short term obligation/ current liabilities (amount due within 12 months time) with the current assets that it holds (Bpp Learning Media, 2009).
Gearing is an essential element which helps in deciding upon the balance between equity
In order to do this they will need to invest more on stores development within the first financial year as indicated by the 16.90% growth from 14.46%. Thereafter, this growth rate is expected to drop steadily for one year and stabilize (13%) in the last two years. It
The acid test shows the ability of the companies to offset their current debts with their current assets excluding inventories. Target’s acid test ratio increases slightly over the three years though it still not adequate