Financial Management

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.