Financial Management - Assignment Solution

Added on - 22 Nov 2020

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FINANCIALMANAGEMENT
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1Question 1........................................................................................................................................1Calculation of NPV (Net Present Value) for the proposal to replace MA02 with MA05......1Question 2........................................................................................................................................4Explaining which project should be accepted with supportive calculations..........................4Question 3........................................................................................................................................7Analysing proposal and making recommendation to the company........................................7Question 4........................................................................................................................................9Critical evaluation of use of NPV as a technique of investment appraisal............................9Question 5......................................................................................................................................11Identifying and critically evaluating use of alternative approaches to investment appraisaltechniques on reflecting circumstances of Hamilton Ltd.....................................................11CONCLUSION..............................................................................................................................15REFERENCES..............................................................................................................................16
INTRODUCTIONFinancial management is required so that finance can be used in an appropriate way andit can be managed in a better manner. Investment appraisal methods are quite useful in thiscontext as funds should be applied only in high return yielding project. Present report deals withHamilton Plc. which is planning to replace existing machinery with MA05. The existingmachinery has only two years of estimated life and sales are estimated and are given. Future cashflows are calculated by using NPV and critical analysis is explained in a better way. Thelimitations of NPV are provided as management of firm thinks that it is not an appropriatetechnique to rely upon and make decisions.In context to this, alternative approaches are discussed such as IRR, payback period, IRRand discounted payback period. Hence, company can evaluate the cash flows of two machineriesand decisions can be made with regard to investment appraisal methods and take enhancedecision for yielding better returns. Furthermore, organisation will be able to make a goodjudgement as it cannot rely solely on one method for the purpose of making investment whetherorganisation should invest in it or not. This is essentially required to evaluate project on paybackperiod to know that when will the project recover initial amount of investment made so thatappropriate decisions can be made in the best possible manner. Thus, other alternatives areexplained along with advantages and disadvantages to provide good overview to Hamilton Inc.to make firm able to invest in machinery and garner higher productivity.QUESTION 1Calculation of NPV (Net Present Value) for the proposal to replace MA02 with MA05For taking decisions regarding purchase of machinery by replacing with older one hasbeen calculated below:MA02MA05MA02MA05MA02MA05Particulars201920202021Sales6200001150000600000145000001320000Rawmaterials620001380006000017400001584001
5580001012000540000127600001161600Addinginflation by5 % on rawmaterial27900506002835066990060984Inflatedsales figure5859001062600568350134299001222584Less:ProductioncostsOthervariablecosts1550002070001500002610000237600Addinginflation by3 % on rawmaterial46506210900015660213841596502132101590002766600258984Contractlabour costs15000013200015000011400015000096000Addinginflation by2 % oncontractlabour costs300026406000456090005760153000134640156000118560159000101760Total costs312650347850315000395220159000360744Profit273250714750253350947770-1590008618402
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