Financial Management .

This article discusses investment appraisal methods like Net Present Value, Internal Rate of Return and Payback Period for assessing the financial viability of a project. It also evaluates the liquidity position of a company using current ratio and quick ratio. The article concludes by discussing the symptoms of overtrading and how they were not observed in the company.

Running head: FINANCIAL MANAGEMNT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

Table of Contents
Part A...............................................................................................................................................3
Part B...............................................................................................................................................7
Reference.......................................................................................................................................10

Part A
1) Investment Appraisal Methods
The three-investment appraisal used for assessing the viability of the project were the Net
Present Value, Internal Rate of Return and the Payback Period. The common investment
appraisal techniques are applied for assessing the financial viability of the project. The Net
Present value shows the profitability of the project generated while investment. The net present
value of the project was around 57.79 that shows the net profitability from the project. The
internal rate of return for the project was around 12% and the payback period for the project was
around 3.23 years. The required rate of return for the project was taken as 105 for discounting
the cash flows and for assessing the viability of the project (Baum and Crosby 2014). The
payback period for the project was less than the four years of time, which is well within the
period of the project. However, it is crucial to note that the internal rate of return from the project
was around 12%, which is less than the company Return on Investment from similar project is in
the historical period. There are other factors and conditions like the sustainability in the cash
flows and the recovery of the profitability of the company are some of the common terms, which
should be assessed and evaluated by the company (Gotze, Northcott and Schuster 2016).
2) Project Evaluation
a) The financial viability and assessment of the project should be done based on the
investment return provided by the project and the required rate of return from the
same. There are various factors, which should be evaluated for a project based on the
sustainability and profitability of the project (Magni and Martin 2017). The
profitability of the project was measured in the terms of the net present value created

for the investors of the company. The net present value of the project was at positive
level, which indicates that the shareholders wealth will increase by the profitability
from the project. The company should go ahead with the project as the net present
value and the Internal rate of return is positive for the company and the same was
assessed by applying the initial investment for the project and the annul expected cash
flow from the project (Banerjee 2015). The payback period for the project was quite
less than the company’s target for payback period and the same will help the
company in the recovery of the investment done by the company. However, the return
on investment as observed by the company that the ROI from the project for the most
recent years were around 18% but it is not possible for the company to have the same
type of investment and profitability from every project (Liu et al. 2017). The internal
rate of return was quite much higher than the required rate of the project for the
company, which shows that the management of the company should accept the
project as the same would help in creating value for the company.
Net Present Value Flows Cash Flows@10%
0 -1200 -1200
1 200 181.8181818
2 250 206.6115702
3 471 353.8692712
4 456 311.4541356
5 247 153.3675668
Net Present Value 7.120725733

Time
Cash
Flows
Current Year -1200
Year 1 200
Year 2 250
Year 3 471
Year 4 456
Year 5 147
Year 5 (Scrap Value) 100
Internal Rate of
Return 10.04%
Payback Period
200 1
450 2
921 3
1377 0.611842
3.61 Years
b) The advantages and disadvantages of the investment appraisal techniques evaluated
are:
Net Present Value
Advantage: The key advantage of the Net present value method is that it shows the
final profitability of the project after assessing and evaluating the necessary factors into
consideration for the project.
Disadvantage: The disadvantage of the net present value method is that it does not
shows the profitability in a uniform basis where the return could be evaluated and
measured in terms of percentage and the same could be assessed for evaluating with
various types of projects (Brigham et al. 2016).

Payback Period
Advantage: The key advantage of the payback period is that it helps in assessing the
recovery of the initial investment of the project and the tenure taken for the recovery of
the same amount.
Disadvantage: However, the key limitation for such project is that the same ignores the
concept of the time value of money while assessing the financial viability and recovery of
the initial amount for the project.
Internal Rate of Return
Advantage: The method incorporates the concept of time value of money into
consideration while evaluating the project. The application of direct and indirect cash
flows are also taken into consideration while evaluating the project.
Disadvantage: The final decision based on the percentage return may not always be
profitable for the company. The IRR gives a variety of rates, which may at times be
confusing for the investors to evaluate.
c) The common investment appraisal techniques applied and used from the industry
wide perspective is the application of the Net Present Value, Internal Rate of return
and the discounted payback period of the project. The above investment appraisal
techniques are some of the common investment appraisal techniques applied for
assessing the financial viability of the project and taking the same into consideration
for the project (Burgett and Greene 2018). The application of the discounted payback
period in contrast to the payback period is a much refined measurement tool applied
for evaluating the recovery of the initial investment. The investment appraisal

techniques applied by the company for the assessment of the project should be
viewed in the context of the overall financial visibility and viability of the project.
Part B
a) The liquidity ratio for the company was evaluated using the current ratio and the quick
ratio for the company and the liquidity position of the company was observed in the
company with respect to the same. The liquidity position for the company shows the
ability of the company in paying off with the current obligations of the company by
utilizing the current assets of the company. The current ratio for the company was around
1.24 in the year 2016 and the same has declined to about 1.14 in the year 2017. This
shows that the liquidity position of the company has decreased in the following trend
period analyzed for the company. The working capital ratio for the company was derived
by applying the formula of Current Assets-Current Liabilities. The working capital for
the company was around $102.9 in the year 2016 and the same has declined to about
$71.3 in the year 2017. The working capital of the company has decreased in the year
2016-17, which might influence the operations of the company and the liquidity position
of the company at the same time (Heikal, Khaddafi and Ummah 2014).
b) The cash conversion cycle of a firm shows the time taken by the firm for the purchase of
inventory and the receipt of the cash from the accounts receivable of the company (Wang
et al. 2014). The time taken by the company for converting the receipts of the consumers
into the final sales of the company are some of the common features, which includes the
cash conversion cycle of the company (Kinsella 2016). The cash conversion cycle for the
company was around 8.72 days. The following formula was applied:

Cash Conversion Cycle = Days of Inventory+ Days of Sales-Days of Payable Outstanding
Days of Inventory (Inventory/Cost of Goods Sold)*365
Days Sales of Outstanding (Accounts Receivable/Revenue)*365
Days Payables Outstanding (Accounts Payable/Cost of Goods Sold)*365
Days of Inventory
Inventory 119
Cost of Goods Sold 1478.6
Days 365
Days of Inventory 29.37576085
Days Sales of Outstanding
Account Receivables 400.9
Revenue 2065
Days 365
Days Sales of Outstanding 70.86125908
Days Payables Outstanding
Accounts Payable 370.7
Cost of Goods Sold 1478.6
Days 365
Days Payables Outstanding 91.50919789
Cash Operating Cycle 8.727822045
c) The working capital of the company has decreased for the company in the trend period
analyzed for the company. The operations of the company is primarily dependent on the
cash flows of the company and the liquidity position and the working capital of the

company has decreased for the trend period analyzed for the company. The revenue
growth for the company was seen to be at a significant level and the profitability for the
company at the same time has grown for the company in trend period analyzed for the
company (Mathuva 2015).
d) The symptoms of overtrading includes the performance of the company in various
aspects and under various factors the operations of the company. The growth of revenue
for the company, the falling operating margin, and the increasing current ratio for the
company are some of the common symptoms of overtrading. The symptoms of
overtrading were not observed in the company as the revenue for the company along with
the operating margin or the gross profit margin for the company increased. The current
ratio for the company showed a decline in the trend period analyzed for the company
thereby not showing a symptom of overtrading. Thus the two factors identified and
analyzed for the company evaluated for the company shows that the symptoms of
overtrading were not observed in the company.
Symptoms of Overtrading
Particulars 2017 2016
Sales Revenue 2065 1788.7
Cost of Sales 1478.6 1304
Gross Profit 586.4 484.7
GP (%) 28.40% 27.10%

Reference
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