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Financial Managment worksheet 2 - Essay Example
Author : nmonahan
Pages 5 (1255 words)
Timing differences and project size may impact financial analysis. However, if financial analysis reveals that two projects are identical in terms of return on investments; then there is no impact on decision making process on the basis of project size and useful life…
Then the financial analysis should also incorporate the effect of finishing project A (in 5 years) and starting project C (and continuing it for 2 years) while making the decision between project A and B.
If your organization grew by 10% - identify the incremental costs you would incur. What if your organization grew by 100% How/why would the costs differ Discuss this concept in relation to accounting and economic factors.
The incremental cost would increase in the same proportion (10%) for some time. This is because the existing fixed cost will not change till the entire existing capacity is exhausted. Up to this stage, there will be a direct relationship between organization growth and increase in incremental costs. However, once the existing capacity is exhausted and there is a need to obtain additional equipment, plant, etc., then the fixed cost will increase as well. In this case, the relationship between incremental cost and organization growth will no longer be 1:1.
From economic standpoint, the relationship between incremental cost and organization growth may not be direct even for small growth (10%). This is because there may be other economic factors to consider, for example, potential projects that may have to be let go due to organization growth in one business line.
Yes, EVA has an impact on capital budgeting decisions. ...