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Financial Mangement 1 - Essay Example

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Financial Mangement 1

2008 1700 0.592 1006
2009 1900 0.455 865
2010 1300 0.350 455
2011 6550 0.269 1762
5242
Less initial cash outlay 5500
258
STEP 3
After now getting a negative NPV from step 2 above interpolate the results
I. R. R = lower discounting + [N. P.V at lower discounting rate - NPV at I.R.R] HDR
rate NPV at LDR - NPV at H.D.R LDR

Where HDR = Higher Discounting Rate = 30%
LDR = Lower Discounting Rate = 11%
IRR = Internal Rate of Return
& NPV at I.R.R = 0
I. R.R = 11% + [3362 - 0] (30% - 11%)
3362 - - 258

= 11% + 17.65% = 28.65%
Since the internal rate of return is greater than cost of capital the project should be accepted.

B
The initial research costs of 500 will have to be capitalized and form past of the initial cash outlay (investment). This is because the cost can be directly attributable to the cost of the project. It is not a period cost and hence cannot be treated as a normal expense.
Working capital will comprise of the salvage value of the plant and machinery and the additional capital of 1,000,000 & 5,000,000 invested on 31st Dec 2006 & 31st Dec 2007 respectively, working capital are the financial resources which shall be availed at the end of the project life. These can be invested. They are assumed to be past and pared of the economic benefits flowing onto the enterprise. But should be captured at the end of the fifth year. Depreciation is a non- cash item. Depreciation is not taxed. Instead the entrepreneurs are given a wear and tear allowance. It is excluded from taxation and their added back to arrive at the Net operating cash flows.

The following factors highly affect the earlier decision of accepting the project.
a) The sales are first an estimated and do not reflect the...
These can be invested. They are assumed to be past and pared of the economic benefits flowing onto the enterprise. But should be captured at the end of the fifth year. Depreciation is a non- cash item. Depreciation is not taxed. Instead the entrepreneurs are given a wear and tear allowance. It is excluded from taxation and their added back to arrive at the Net operating cash flows.
Raising finance through issuing of more shares will lower the gearing level of the firm. Gearing refers to the extent to which the assets of the firm have been financed using borrowed capital. The raising of more shares will make the ordinary share capital and other equity instruments in totality to outweigh the fixed charge capital in the capital structure gearing, being a ratio of fixed charge capital vs. equity will then be lower. What would happen is that the current shareholders would be diluted by an additional issue of shares.
This firm has already and overdraft of 40,000 which has not been financed. Any additional borrowing would increase its financial risk. This might ultimately lead to insolvency of Barnsley. It would mean that the firm will be highly geared because shall have been increased by virtue of going for the loan. In addition the loan is short -term in nature. The providers of the loan would therefore require that it be surfaced within a short time period. This may in return affect Barnsley's working capital.
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Summary

The initial research costs of 500 will have to be capitalized and form past of the initial cash outlay (investment). This is because the cost can be directly attributable to the cost of the project. It is not a period cost and hence cannot be treated as a normal expense.
Author : eturcotte
Financial Mangement 1 essay example
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