Financial Management

This document provides information on financial management, including incremental cash flows, payback period, net present value, and present value index. It also discusses the evaluation of a project and the net loss incurred by the company. References are provided for further reading.

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

1FINANCIAL MANAGEMENT
Table of Contents
Question 7........................................................................................................................................2
References........................................................................................................................................5

2FINANCIAL MANAGEMENT
Question 7
a) The incremental Cash flows were calculated with the help of all cash inflows and cash
outflows of the company. The incremental cash flows were calculated with the help of
costs savings that the company will be getting from the manufacturing process. There
were several assumption taken like the interest cost were not taken into account for the
purpose of calculation of the cash flows as the cost of capital will be used for calculating
the net present value of the project. The incremental cash flows were as follows:
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Machinery Purchased -500000
Reduction in Manufacturing
Costs 190000 190000 190000 190000
Working Capital -35000 35000
Salvage Value of Assets 20000
Total Cash Inflows/(Outflows) -535000 190,000 190,000 190,000 245,000
Depreciation of Asset 125000 125000 125000 125000
Building Lease 30000 30000 30000 30000
Overhauling Charges 15000 15000 - -
Total Expenses 0
170,0
00
170,0
00
155,0
00
155,0
00
Before Tax Cash Flows 20,000 20,000 35,000 90,000
Taxation @30% 6000 6000 10500 27000
Net After Tax Cash Flows 14,000 14,000 24,500 63,000
Add: Depreciation 125000 125000 125000 125000
Net Cash Flows -535000 139,000 139,000 149,500 188,000
b) The payback period for the project is greater than 4-years of period as the project
investment for the purchase of the fixed asset is greater than the return actually generated
by the project.

3FINANCIAL MANAGEMENT
Payback Period
Year 0 1 2 3 4
Cash Inflows/(Outflows) -535000 124107 110810 106411 119477
Payback Period -410893 -300083 -193672 -74194
1 2 3 4
c) The evaluation of the project was done for the Bright Ltd whereby a net loss was
calculated for the project because of the high fixed cost associated with the project and
the low earnings of the company in contrast to the expenses associated with the project.
The net present loss for the company was around -$74,194 resulting in a destruction of
the initial invested capital investment1.
Net Cash Flows -535000 139,000 139,000 149,500 188,000
Discount Factor 1 0.89 0.80 0.71 0.64
Discounted Cash Flows -535000 124107 110810 106411 119477
Net Present Value -74194
d) The present value index of the project was calculated with the help of the initial
investment done by the company and the net present value created by the company.
Present Value Index (P.V.I) Net Present Value/Initial Investment
Present Value Index (P.V.I) -0.138681051
e) The analysis of the project investment undertaken by the Bright Ltd will be done for the
purchase of the equipment whereby the company will be incurring a net loss for the
project. The research cost that will be incurred by the company will be taken as a sunk
cost for the company, which will not be taken into analysis for the purpose of considering
1 Andor, Gyorgy, Sunil K. Mohanty, and Tamas Toth. "Capital budgeting practices: A survey of Central and Eastern
European firms." Emerging Markets Review 23 (2015): 148-172.

4FINANCIAL MANAGEMENT
the net cash flows for the company. The company will be incurring a net loss of -
$74,194, which is not suitable as per the required rate of return for the project2.
2 Lima, Afonso Carneiro, et al. "A qualitative analysis of capital budgeting in cotton ginning plants." Qualitative
Research in Accounting & Management 14.3 (2017): 210-229.

5FINANCIAL MANAGEMENT
References
Andor, Gyorgy, Sunil K. Mohanty, and Tamas Toth. "Capital budgeting practices: A survey of
Central and Eastern European firms." Emerging Markets Review 23 (2015): 148-172.
Lima, Afonso Carneiro, et al. "A qualitative analysis of capital budgeting in cotton ginning
plants." Qualitative Research in Accounting & Management 14.3 (2017): 210-229.