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Finance for Managers | Analysis

   

Added on  2019-11-20

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Academic Analysis 1Finance for Managers (FM)Student Name:Student ID:Subject Name:Subject ID:Date Due:Professor Name:1 | P a g e

Option 1: If sponsor acts on your recommendations that you are putting forward, what value will it add to the firm and should the sponsor take up the project or not? Financial decisions are crucial for evaluating and determining most favorable terms for raising ofcapital. Sponsors while investing money into projects needs to understand the spending capital expenditure which can generate value for the firm[ CITATION Bro073 \l 1033 ]. Thus, the recommendations include step-by-step decision making such that cost of capital can be ascertained. The primary focus for managers includes to analyse future outlook that a particular project can generate, where capital will be invested, leading to increase in value for the firm. As in any project it becomes critical to compensate sponsors from capital employed and provide them with returns that they expect for covering their cost of capital. Capital budgeting is a procedure undertaken by most managers for assessing systematically sponsor’s investment and returning their cost of capital in a suitable manner[ CITATION Sto08 \l 1033 ]. For understanding value that is generated from a particular project, managers need to estimate future cash flows andoutcomes from the investment. Timings for each cash flow is also integral according to time value of money. Capital budgeting forms an integral activity that helps decide merits and demerits of an investment project, hence helps decide growth initiatives. Such assessment allowsto ascertain investment rate of returns that will be generated from the project, hence evaluating whether a project will be unacceptable or acceptable. Through process of capital budgeting measurability and accountability of the firm is created[ CITATION Mag09 \l 1033 ]. It identifies resources that a particular business needs to invest in and assessing their risks and returns of the sponsors. Without determining effectiveness of investment decisions, there remains minor chance to exist in the competitive marketplace. Sole idea behind a project investment or businessis to earn profits, through capital budgeting long-term financial and economic profitability for a particular project can be best understood[ CITATION Bak10 \l 1033 ]. Managers generally invests in projects that can benefit the future outlook for the firm for increasing overall value for the business. Managers key focus is to increase value and compensate investors or sponsors of projects through their capital employed with an expected rate of return. Cost of capital is the key to obtaining further future investments and sponsors for projects, hence goal of managers is to 2 | P a g e

maximize returns over and above generating costs of capital. By adopting capital budgeting managers systematically assess each investment project of the sponsors. Capital budgeting enables managers to create an overall outlook and outcome for investments. At any point of time,a firm can undertake several projects at the same time. Hence, specific project inflows case by case investment analysis using techniques help generate future cash flow predictions. The case highlights the following two projects for assessing their potential outcomes:Initial CostAfter-Tax, End of Year, Project Cash Flows, CFt01234Project S-$10,000$5,000$4,000$3,000$1,000Project L-$10,000$1,000$3,000$4,000$6,760The above two projects namely, Project S and Project L have been undertaken for analysis for estimating the future benefits or returns they are going to generate. These projects are estimated using five techniques namely, NPV, Payback period, ARR, PI and IRR for understanding their effectiveness and value that they will generate for the firm. In case sponsors take up the recommendations provided to them then the following will be the value addition done to the firm;Developing and formulating long-term strategic goals: Businesses needs to undertake several projects at the same time or one at a time. Through undertaking of such projects they make profits, which are done by development of long-term strategic goals[ CITATIONBal072 \l 1033 ]. Long-term strategic business goals might be to undertake several projects to several projects and create competitiveness in the market. Such can only be implemented by means of capital budgeting techniques of Net Present Value, Payback period, Accounting Rate of Return, Profitability Index and Internal Rate of Return. Through capital budgeting techniques, managers are able to appraise value for every investment project thus creating a framework for the firm to establish and set its long-term future directions[ CITATION Fro072 \l 1033 ]. Building and incorporating long term 3 | P a g e

strategic goals are the key to success and sustenance of the business for the firm. Thus, in case a firm is not able to make a decision for its long-term it will lag behind amongst its competitors and will not be able to extend its core competency. Undertaking long-term strategic planning and goal orientation can be done, in cases current projects costs are ascertained. Financial decisions involving current projects are crucial for future planning and long-term success of the business, by understanding its cash-flows[ CITATION Car0811 \l 1033 ]. Thus, capital budgeting recommendations allows a firmto generate value for its business by ascertaining long-term impacts for a particular project. Seeking out for new investment projects: A firm’s capability to evaluate investment projects, allows it to look out for new projects. New projects are critical for any firm as itallow profitability for all key business functions and compete in their profits in the industry[ CITATION DeR081 \l 1033 ]. Assessing a running projects cash flow will allow creation of funds for undertaking of new projects for future endeavors. Along with diagnosing set of current projects, it becomes critical that the firm undertakes future projects investment related decisions. A firm’s future investment decisions for all projects that it undertakes will help attain business growth. New projects can help value-add to the firm by generating cash flows for stabilizing in case current projects lag behind in their cash flows due to any unprecedented event[ CITATION Coo11 \l 1033 ]. Analysing capital budgeting decisions for current projects can help predict cash flows forthe future that they can generate and planning for future investment projects that can yield future cash flows. Newer investment projects can also help regulate cash flows in cases any events happen, thus enabling stabilizing of firm’s businesses. Estimating and forecasting future cash-flows: In case of any business firms, it becomesessential that it can foresee the future cash flows that are being generated from a particular project overtime[ CITATION Zim111 \l 1033 ]. Capital budgeting is a technique that allows executives to analyse potential project impact for understanding the impact 4 | P a g e

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