Concepts of Finance For Managers

Added on - 06 Jan 2020

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FINANCE FOR MANAGERS
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3(1) Preferred option for the hospital and parameters for evaluation.....................................3(2) Importance of different financial areas.............................................................................4(3) Evaluation of option and other non-financial factors that need to be considered whilemaking decisions....................................................................................................................5(4) Recommendations of the ways in which organization can evaluate a project.................5CONCLUSION................................................................................................................................6REFERENCES................................................................................................................................7APPENDIX......................................................................................................................................8
ToThe Top managers ofGreenacre HospiceDate: 17-08-2016Subject: Evaluate of projectsINTRODUCTIONProject evaluation is a difficult task and for selecting the most appropriate one, lots ofthings are needed to be considered. In this report, results produced by excel sheet are evaluated.Apart from that, non-financial factors are identified that may affect the profitability of project.At the end of report, conclusion is prepared on the basis of entire work.(1) Preferred option for the hospital and parameters for evaluationProposals that are put forth by management accountant are given below.Proposal 1-Cafe will be run continuously be volunteersProposal 2-Giving cafe on lease either to Starbucks or Greasy Joe'sProposal 3-Modernizing cafe which will be run by hospital departmentOn analysis of all three options that are available, third alternative seems to be viable forthe hospital. This is because; net present value of third alternative is higher than the secondoption. From the spreadsheet provided by management accountant, it can be observed that netpresent value of second alternative is 7, 06,625 and same of other project that comes in theseoptions is 7,37,348. Net present value of third option under which cafe will be modernized is 8,08,251. On the basis of higher NPV, third option is assumed to be the preferred alternative fromoutside (Net present value,2013). There are number of parameters that must be considered forthe evaluation of project. Some of them are given as below:For the estimation of cash flows, growth rate is assumed and used for the calculation. Inmeeting, it is important to make sure that annual growth rate that is taken for projectionof cash flows is reliable. It is practically possible to earn profit at the rate that is selectedfor computing future cash flows.There are many assumptions that are made by the management accountant for makingprojections (Bamber, Jiang and Wang, 2010). Detailed analysis of these assumptionsmust be another parameter for evaluation. This is because; if things that are assumed
will be wrong then non-viable project can be selected for the hospital.Interest rate that is taken in to computation that is challenged from outside. It is also oneof the most important parameter of project evaluation. In projections interest rate is 10%which is loan rate for debt taken for 2-3 years. Here, property is given on lease for 10years. For such duration loans are available at 6%. Hence, under sensitivity analysisfrom6-10%interest rate is considered and present values cash flows are again computedatdifferent interest rates.Due reduction in interest rates profitability of both options alsoincreases.(2) Importance of different financial areasThere are different financial areas that must be kept in mind while deciding whetherspecific proposal must be selected and if so, then on what basis it should be run have to bedetermined. The first financial area that needs to be considered is cost of capital that hospitalneeds to pay in case if it takes debt from bank. Some objectives and limitations in this regardare given as below:ObjectivesMain objective while taking loan must raise debt at minimum interest rate so that cost offinance can be kept low to maximum possible level.LimitationsIf loan will be taken then it may badly affect the hospital’s financial condition. In case ifhospital will face any financial crunch due to low profitability or sudden plunge in operatingcost then finance cost may further bring down its profit (Kolk and Pinkse, 2010). Hence, in thefuture, condition may become worse. This is evidenced from current financial condition ofTesco.Hospital needs to evaluate its sources of finance and to meet the financial requirement, itneeds to prepare a balance between them so that cost of finance can be minimized as much aspossible. In order to finance entire capital investment, some amount that is received throughdonations and banks can be used in specific proportion. This will certainly help the firm incontrolling its cost. Objectives and limitations are given as below:ObjectivesTo finance the investment amount in 50:50 ratio by using bank loan and amount
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