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Financial Management Assignment - Plaggio Ltd

   

Added on  2020-10-04

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FINANCIAL MANAGEMENT

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1QUESTION 1..................................................................................................................................1A. Calculation of payback period................................................................................................1B. Calculating accounting rate of return......................................................................................2C. Calculating present value of each tender.................................................................................3D. Calculating internal rate of return for each tender..................................................................4E. Recommendation for the most profitable project with justification........................................4QUESTION 2..................................................................................................................................6A. Determining firm’s after-tax cost of debt................................................................................6B. Calculating firm’s cost of equity and it’s WACC...................................................................7C. Explaining two factors that are beyond firm’s control............................................................8D. Discussing four methods of raising money with advantages and disadvantages....................8CONCLUSION..............................................................................................................................10REFERENCES..............................................................................................................................11

INTRODUCTIONIn uncertain and ultra-competitive market, companies need to be update itself with thesudden changes and adjust their financial plans and policies accordingly to meet their financialgoals. Strategic financial management refers to a plan that focuses only on the financialresources. It is a process of planning, organizing, supervising, directing and controlling themoney related transactions. Procurement of funds with balanced capital structure, its effectiveutilization, cost controlling and others are the main focus of the financial management. Thecurrent investigation targets to assess how project evaluation methods are helpful for Plaggio Ltdto select the most beneficial investment project. Second section will discusses about the cost ofcapital calculation and critically evaluates four different sources of raising money. The sectionwill also determines cost of equity using CAPM (Capital Assets Pricing Model), cost of bondand weighted average cost of capital (WACC) as well. QUESTION 1Now-a-days, upcoming of new and latest technologies necessitates for the firms toreplace existing machinery with the newer techniques. It helps them in meeting their productiontargets and drive efficiency in their operations. Due to technological obsolescence, PLaggio Ltdis looking for replacing its old machinery with the new production machine so as to meetincrease in its production volume and thereby meet maximum potential demand of customers.There are three different alternatives from where company can purchase new machinecategorized as Tender A, Tender B and Tender C. All these proposals are totally mutually-exclusive projects however, company needs to select only one which is highly profitable. CapitalBudgeting, also called investment appraisal or project evaluation are the great ways that PlaggioLtd can use to determine the most profitable option among these three alternatives. The methodsassists firm in evaluating potential investment or expenses on future long-lived investments thatrequires huge sum of money (Götze, Northcott and Schuster, 2015). Different capital budgetingmethods are applying here to validate the attractiveness of every tender proposal.A. Calculation of payback periodPayback period method evaluates many projects by determining the length of time that aninvestment would take to repay its beginning outlay. It is usually used by small-sized businessesbecause they are more concerned about liquidity and require large sum of cash flows in the1

business therefore, prefer quick recovery of investment (Götze, Northcott and Schuster, 2015).Its decision criteria demonstrates that project with shorter recovery duration is preferable overother alternatives. YearsCash FlowsCumulative cash flowsABCABC19000010000015500090000100000155000211000010000016500020000020000032000038500080000950002850002800004150004800008000012000036500036000053500058500090000450000450000Payback period:TenderA:3years+(RM310,000−RM285,000)/RM80,000¿3years4monthTenderB:3yearsTenderC:2years+(RM380,000−RM320,000)/RM95,000¿2years8monthB. Calculating accounting rate of return Accounting rate of return acronym as ARR find profit that can be gain on the money thatfirm requires to invest. It is determined by dividing the average annual profit that companyexpects over project life cycle with the average capital employed. The decision rule of themethod suggests a concern to invest money in the project with the maximum ARR (Gotze,Northcott and Schuster, 2016). In the scenario, it is stated that Plaggio Ltd follows straight linemethod (SLM) for depreciation wherein a fixed amount of depreciation is charged every year YearsCash FlowsDepreciation Profitability ABCAB CABC1900001000001550006000050000900003000050000650002

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