Financial Analysis & Management - Assignment

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Financial Analysis andManagement
Table of ContentsINTRODUCTION...........................................................................................................................11. Significance of investment appraisal process.....................................................................12. Critically evaluate the techniques employed in investment appraisal process...................33. Importance and weighted average cost of capital (WACC)...............................................7CONCLUSION................................................................................................................................9REFERENCES..............................................................................................................................10
INTRODUCTIONFinancial analysis and management implies the process of evaluation of budgets,projects, businesses and other finance related organisation for determination of their suitabilityand performances. In general, the financial analysis process is performed in order to analyse thestability, liquidity, solvency and profitability of the business organisation. This Project reportwill discuss about the significance of investment appraisal process and techniques or measures ofinvestment appraisals that are adopted by the companies for determining the profitability of thecompany (Ahi and Searcy, 2013) Finally, the discussion regarding the importance of WACC ininvestment appraisal process is discussed.1. Significance of investment appraisal processDecisions which are linked to the investments are crucial and major decisions for anybusiness firm. Making an investment is the crucial way to enhance and optimise return on thestockholders’ wealth. Although, having right decisions is one of the crucial challenge orconstraints which management faces. Investment decisions are simply means that the initialinvestments are made in order to expect that the project would give the return in near future.Investments could be assessed from diverse perspectives such as its suitability as per the firm’sobjective, social cause, environmental concern and so on. But only cash flows are consideredwhile deciding the soundness of the project. This can be considered by using various investmentappraisal techniques as it has been use as utmost important ways to get complete informationabout the project growth and stability.Here are some of the benefits of investment appraisal techniques which are mentioned asunder:Cash Flow and Time Value of Money:While considering investment appraisalprocedure, forecasting of cash inflows and outflows are the primary objectives which is requiredto know while knowing the project sustainability and react accordingly. This is because, existingneeds for any project will be determined as per the needed finance that could be considered.While on the other hand, in case of forecasting of furniture, all figures are forecasted on relyingon certain condition that are related with the company. The forecasting amount can be presentedin an organisation to measure such forecasted cash amount in accordance with current value.Once these forecasted figures are accessible, organisation measure in accordance with terms and1
condition that are based on present values. It is simply mean time value of money. which issimply elaborates by quoting an example of pound which say that today’s value of pound doesnot equal to the tomorrow’s value of pound. By putting time value of cash, stockholder requiresto be rewarded for positive features or components. Henceforth, this is rightly said that the futurevalue is converted into present value in order to find out the current worth of the cash outflows.(Alviniussen and Jankensgard, 2015)Other inputs:There are various components that are needed to be adopted for measuringof cash flows. For aiming of measure accurate cash flows, an accurate time frame is required tobe known while cash flow has occurred. Although, depreciation cannot cover additional amountrelated business. Henceforth, this can’t be comprised at the time of measuring cash flow. Otherone is calculating working capital. Apart from huge and certain depreciable assets, investmentdoes likewise form in the working capital. This comprises items such as cash, accountreceivables, inventory that are part of organization’s assets and creditors are the part of theorganisation’s liabilities. Other crucial component is the interest and this could be seen from twoaspects. Firstly, if organization is employing its own funds. In such a case, this is losing interestthat it would have earned, by depositing capital in the bank. This does not need any kind oftreatment here, as this has simply been adopted as the opportunity cost and treated accordingly.Discount rate:It has been found that the current value of estimated cash inflows can be taken intoaccount as more reliable for getting better outcomes in case the discount rates. It included thetime value of company. It is the risk free rate in addition with risk premium. Risk premiumincludes the risk which has been arise in execution of specific project activities. There are somemethods in which time value of money are not considered such as payback period method, andaccounting rate of return. In these methods, the discount rate is not required.Risk Free Rate:It includes expected inflation rate along with the interest on capital which is considered asthe opportunity cost of capital. According to the Arnold, the risk free rate forms the bedrock forthe time value of money.2
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