Managing Financial Principles and Techniques

Managing Financial Principles and Techniques Assignment 2 phonation 1 Financial approximation techniques Part 2 Forecasting Part 1-Financial Appraisal Techniques Task 1. NET resign VALUE (NPV) Year control X ? 000Project Y ? 000Discount FactorXY 0-200-200-200-200 1352180. 90931. 815198. 162 280100. 82666. 088. 26 390100. 75167. 597. 51 47540. 68351. 2252. 732 52030. 62112. 421. 863 229219 1)NET kick in VALUE (NPV) X= 229-200=29 Y=219-200=19 PAYBACK PERIOD additive coin die hard Year PROJECT X ? 000Project Y ? 000XY -200-200-200-200 135218-165-18 28010-8528 39010538 47548042 520310045 10045 TASK 2 bring in stick in valuate The deport measure of an investments upcoming salary bills scarpers minus the initial investment. If positive, the investment should be considered (unless an even better investment exists), differently it should non. It is a calculation based on the idea that ? 1 received in go years magazine is not worth as much as ? 1 received now because the ? 1 received now could be invested for those ten years and compound into a mellowed value.The NPV calculation establishes what the value of future meshwork is in todays bullion. To do the calculation you follow up a discount % graze to the future earnings. NPV is said to be short for net present value, it is the present value of net bills in flows. It is commonly used for appraisals on work outs. The advantage of using NPV is that it tells you if a interpret volition add or recupe reckon value from the business and hence decisions ar taken of whether to accept it or deflect it. Advantages It will also add undefiled position for commonly special decl are oneselfs. -It gives an downright value. -NPV allow for the cadence value for the immediate pay upment flows considers both magnitude and timing of cash flows Consistent with sh areholder wealth maximisation Added net present values gene postd by investments are represented in high stock prices. Indicates whethe r a proposed figure will yield the investors inevitable rate of return Disadvantages It is very punishing to appoint the correct discount rate. Many bulk find it difficult to work with a dollar return rather than a percentage return because it is hard to immediately analyze projects unlike say a percentage return as compute using IRR It needs to be interpreted carefully because the overall NPV reflects the scale of the project as well as the rate of return. IRR Like the NPV method used for neat bud larning, the IRR method also uses cash flows and recognizes the term value of money. NPV and IRR may give contradictory decisions where projects differ in their scale of investment. Advantages IRR allows you to compare projects easily because it is a percentage similarly it can direct attention to situations where it mogul be better to do ninefold versions of the same project with a high IRR In calculating IRR it can give an indication of how sensitive the Net Present Value i s to changes in discount rate Considers both the magnitude and the timing of cash flows Disadvantage Multiple internal order of return with unconventional cash flows whatever change in sign (+,-) in period cash flows produces as galore(postnominal) IRRs as at that place are changes in the cash flow directions of the investment, lend or borrowing. Assumes cash flow is reinvested at the IRR rate and this may not be a realistic assumption NPV and IRR compared NPV assumes that project cash flows are reinvested at the companys required rate of return the IRR assumes that they are reinvested at the IRR. Since IRR is higher than the required rate of return, in order for the IRR to be accurate, the company would start out to keep finding projects that would reinvest the cash flow at this higher rate. It would be difficult for a company to keep this up forever, thus NPV is more accurate.NPV method assumes that CFs are reinvested at the live of capital K IRR method assumes that CFs are reinvested at IRR undersurface lead to conflicts in ranking of inversely exclusive projects Crossover NPV is superior to IRR when choosing among reciprocally exclusive investments Pay masking Ignores the time value of money. This weakness is eliminated with the discounted payback method. Advantages It is very simple-minded Helps prevent cash flow problems efficacious where technology changes rapidly or there are other sources of attempt as it asks the question how quickly do we get the money back? Measure of risk and liquidity Useful for evaluating small projects Disadvantages Ignores the time value of money Ignores cash flows after(prenominal) the payback period Objective not consistent with shareholder wealth maximation rather it focuses on risk minimization ARR Advantages It clearly shows profitability of a project It allows sluttish comparison between projects The opportunity cost of investment can be taken into bank tubercle It can be easily compared to the target return on long term capital industrious which is calculated in the same counsel Disadvantages More complex than pay back It does not take into account the set up of inflation on the value of money over a time period. ARR Advantages It clearly shows profitability of a project It allows easy comparison between projects The opportunity cost of investment can be taken into account Disadvantages More complex than pay back It does not take into account the effects of inflation on the value of money over a time period. TASK 3 PUBLIC field PROJECTS bills In be givens TOIN8% Inflation adaptationInflation Adjustment Value T1250001. 0827000 T2250001. 1729250 T3250001. 2631500 T340001. 265040Cash Out accrue OUT10% Inflation AdjustmentInflation Adjustment Value T01000010000 T11000018000 T1180001. 1020900 T2190001. 2122990 Net Inflation adjusted cash flows NPV INOUTNet Cash FlowNet Present Discount FactorDiscounted Cash Flow T0-1000010000110000 T12700010000170000. 8514450 T1-18000180000. 8515300 T2292502090083500. 726012 T3315002299085100. 615191. 1 T35040-50400. 613074. 4 PART 2-FORECASTING DIXON play along Solution NOVEMBERDECEMBERJANUARYFEBRUARYMARCHAPRILMAYJUNE sales/Budgeted gross sales Units (Given)10001200140016001800200022002600 gross sales budgeted/ sales ? work watch over 1)50,00060,00070,00080,00090,000100,000110,000130,000 Budgeted business (Given)12001400160020002400260024002200 follow Budgeted Manufacturing be ? tangible ( running(a) bloodline 2)31,20036,40041,60052,00062,40067,60062,40057,200 ride(working raze 3)9,60011,20012,80016,00019,20020,80019,20017,600 uncertain overheads (working telephone line 4)2,4002,8003,2004,0004,8005,2004,8004,400 decided Overheads (Given)5,5005,5005,5005,5005,5005,5005,5005,500 Total action Cost (working government note 5)48,70055,90063,10077,50091,90099,10091,90084,700 working note 1gross revenue budgeted/ sales ? = Sales/Budgeted Sales Units x 50 working note 2 Material = Budgeted performance x 26 w orking note 3 Labour = Budgeted Production x 8 working note 4 shifting overheads = Budgeted Production x 2 working note 5 Total Production Cost = Material + Labour + variant Overheads+ flash-frozen Overheads Work Out Cash Flow Forecast NovemeberDecemberJanuaryFebruaryMarchAprilMayJune Opening balance wheel35,500 Sales70,00080,00090,000100,000110,000130,000 little Material-41,600-52,000-62,400-67,600-62,400-57,200 Labour-12,800-16,000-19,200-20,800-19,200-17,600Variable Overheads (50%)-6,400-8,000-9,600-10,400-9,600-8,800 Variable Overheads (50%)-6,400-8,000-9,600-10,400-9,600-8,800 Fixed Overheads-5,500-5,500-5,500-5,500-5,500-5,500 Machinery120034000 block Balance Task 2 Solution NOVEMBERDECEMBERJANUARYFEBRUARYMARCHAPRILMAYJUNE Sales/Budgeted Sales Units (Given)10001200140016001800200022002600 Sales budgeted/ sales ? (working note 1)75,00090,000105,000120,000135,000150,000165,000195,000 Budgeted Production (Given)12001400160020002400260024002200 Cost Budgeted Manufacturing Co st ?Material (working note 2)31,20036,40041,60052,00062,40067,60062,40057,200 Labour(working note 3)9,60011,20012,80016,00019,20020,80019,20017,600 Variable overheads (working note 4)2,4002,8003,2004,0004,8005,2004,8004,400 Fixed Overheads (Given)5,5005,5005,5005,5005,5005,5005,5005,500 Total Production Cost (working note 5)48,70055,90063,10077,50091,90099,10091,90084,700 working note 1 Sales budgeted/ sales ? = Sales/Budgeted Sales Units x 75 working note 2 Material = Budgeted Production x 26 working note 3 Labour = Budgeted Production x 8 working note 4Variable overheads = Budgeted Production x 2 working note 5 Total Production Cost = Material + Labour + Variable Overheads+ Fixed Overheads Work Out Cash Flow Forecast NovemeberDecemberJanuaryFebruaryMarchAprilMayJune Opening Balance35,500 Sales70,00080,00090,000100,000110,000130,000 Less Material-41,600-52,000-62,400-67,600-62,400-57,200 Labour-12,800-16,000-19,200-20,800-19,200-17,600 Variable Overheads (50%)-6,400-8,000-9,600-10, 400-9,600-8,800 Variable Overheads (50%)-6,400-8,000-9,600-10,400-9,600-8,800 Fixed Overheads-5,500-5,500-5,500-5,500-5,500-5,500 Machinery120034000 Closing Balance