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Financial Mangement Decisions - Essay Example

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Financial Mangement Decisions

With an interest of capital at 10% seeing from the NPV table we multiply the values with the respective year cash flow. Then we add all the present values and subtract the initial investment to reach the NPV. The NPV is $1,021,901.
The NPV shows a huge and positive value of $1.2 million. The accounting theory says that any project with a positive NPV should be accepted. This criterion is met and it is the most important criteria since it keeps the time value of money into consideration for the whole stream of the cash flows.
Any changes done in the above cash flows can and cannot change the decision. However this depends on the value of the change at the end of the project. The additional building would have to be further depreciated and this may cause the change in decision. And depending on the amount of money invested the NPV could also become negative leading to a change in decision. Also it needs to be noted that the payback period is very close to the 3 year policy of the company. If the payback period changes and goes over the 3 year mark, then the project would be rejected.
Question - Many corporate acquisitions result in losses to the acquiring firms' stockholders. Accordingly, why do firms purchase other corporations Are they simply paying too much for the acquired corporation A co-worker asks your opinion. Specifically state the reasons for your argument.
According to a research done by Sara Moeller, Frederik ...
1,021,901


3) Based on your answer for question 2, do you think the project should be accepted Why Assume Superior has a P/B (payback) policy of not accepting projects with life of over three years.

Yes, the project should be accepted based on the calculations done above.

The NPV shows a huge and positive value of $1.2 million. The accounting theory says that any project with a positive NPV should be accepted. This criterion is met and it is the most important criteria since it keeps the time value of money into consideration for the whole stream of the cash flows.

The criterion set by Superior is also met as the payback is less than three years (2 years 11 months).

Since both criterions are met, it is advised that this project should be accepted.
4) If the project required additional investment in land and building, how would this affect your decision Explain.
Any changes done in the above cash flows can and cannot change the decision. However this depends on the value of the change at the end of the project. The additional building would have to be further depreciated and this may cause the change in decision. And depending on the amount of money invested the NPV could also become negative leading to a change in decision. Also it needs to be noted that the payback period is very close to the 3 year policy of the company. If the payback period changes and goes over the 3 year mark, then the project would be rejected.



Part Two

Question - Many corporate acquisitions result in losses to the acquiring firms' stockholders. Accordingly, why do firms purchase other corporations Are they simply paying too much for the acquired corporation A co-worker asks your opinion. Specifically state the reasons for your argument.
In your own words, please provide a ...Show more

Summary

The initial investment is of $1,200,000. Time taken to recover this amount is during the third year. This can be seen by adding the cash flows of the first three years (295,875 + 456,750 + 456,750) which comes out to be $1,209,375 which is more than the investment…
Author : ykoch
Financial Mangement Decisions essay example
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