FIN200 Corporate Financial Management Report

Added on -2020-02-24

| FIN200| 16 pages| 3861 words| 59 views

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CORPORATE FINANCIAL MANAGEMENT
Table of ContentsINTRODUCTION...........................................................................................................................1Capital budgeting decisions.........................................................................................................1Sensitivity analysis in capital budgeting decisions......................................................................2Scenario analysis.........................................................................................................................4Break even analysis.....................................................................................................................7Simulation techniques..................................................................................................................9Recommendations......................................................................................................................11CONCLUSION..............................................................................................................................11REFERENCES..............................................................................................................................13
INTRODUCTIONCapital budgeting decisions are most crucial for the organization as they are linked to thesuccess of the enterprise in every possible manner[ CITATION Ahm13 \l 1033 ]. Apart from thisfor effective decision making different tools are present such as break even, simulation techniquethat assists business in enhancing their market performance and leads to favorable results. Therange of capital budgeting techniques present such as net present value, internal rate of return,the average rate of return, etc. allows in evaluating the project and in turn it can easily knowwhether it is feasible to invest in the proposal or not. In short capital budgeting decisions are most crucial, and they are associated with longterm performance of an enterprise. The present report carried out is based on analysis of differenttechniques such as break even, simulation, sensitivity which can be used in the capital budgetingdecisions. Capital budgeting decisionsIt can be defined as the decision taken by the management of the enterprise to allocatefunds to any particular project with the motive to yield a high rate of return along with anotherform of benefits[ CITATION Bie14 \l 1033 ]. The range of investment decisions takes intoconsideration new product investment, expansion, modernization, etc. The key associated withcapital budgeting decisions involves long term consequences, difficult to reverse and considersthe substantial outlays[ CITATION EDU15 \l 1033 ]. All the range of decisions taken by the business requires in-depth analysis like in case ifany investment proposal is seen as then it is necessary to consider pros and cons of the project sothat higher return can be obtained by investing into the proposal[ CITATION And151 \l 1033 ].Different types of techniques are present by which investment decision can be taken, and itallows for efficient utilization of financial resources which is fruitful for the business in everypossible manner. The range of capital budgeting techniques is as follows:Internal rate of returnIt is considered as the rate at which net present value of the investment is zero. Apartfrom this, the discounted cash inflow is equal to outflow. The main benefit associated with thistype of technique is that it considers the time value of money[ CITATION Goo13 \l 1033 ]. Inshort, this method allows in knowing how much return a particular project can provide during its1
useful life. The minimum rate of return that is required is set by management, and in the majorityof the time, it is regarded as the cost of capital to the business. For instance, any organization is planning to replace its old machines with the newmachine to boost business efficiency. The installation cost will be $8475, and it will reduce thelabor cost by $1500. The useful life of the machine will be ten years, and the rate of return is15%.So, applying the concept of internal rate of return in the present scenario Internal rate of return factor = Net initial investment / Annual cash inflow = 8475/1500= 5.65Initial cost = $8475Annual saving = $1500Project life = 10 yearsParticularsYearAmount of cashflow12% factorPresent valueAnnual cost1-1015005.658475Investment (8475)1.00(8475)Net present value0So, by overall analysis, the proposal will not be accepted as the rate of return derivedfrom the proposal 12% is less than as compared with the minimum rate which is 15%.Net present valueIt is considered to be one of the most famous capital budgeting techniques that allowmanagement in appropriately taking investment decisions. It is the difference between presentvalue of cash inflow and outflow which can be positive, negative or zero. This method usesdiscount cash flow in the analysis which helps in identifying the most appropriate present valueof the project[ CITATION Del13 \l 1033 ]. It allows the evaluation of cash flow forecasts alongwith the weighted average cost of capital. Sensitivity analysis in capital budgeting decisionsSensitivity analysis allows in knowing how much change in an input will influence theoutput of the business. It allows in handling uncertainty associated with the organization and inturn long term performance of the enterprise can be easily managed with the help of this like2

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