This report discusses the process of financial decision making in investment scenarios, focusing on cost analysis and net present value. It explores different case scenarios and their impact on profitability.
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INTERNATIONAL FINANCIAL MANAGEMENT Table of Contents
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INTRPDUCTION Investment decision making is defined as taking the decision in against to multiple investment options are availed with the business entity. This involves taking such decision that can generate the best possible and economic results in favour of the organisation. This report will discuss the three different case scenarios in order to analysis different areas of the financial decision making process. Three different case scenarios are discussed under this project that depicts different concepts associated with the financial decision making in project. Question 1 Businessdecisionmakingissolelyinfluencedwiththeprofitabilityofthe organisation. In context to the investment in a certain proposal this become necessary that the organisation look for the option that can bring the most favourable inflow as compare to the net investment incurred by the organisation. When the investment decision making needs to be taken on the basis of expenditure incurred than such option is selected that can generate the most favourable outflow or it can further be stated as the option that can derive the least possible outflow of financial resources from business. Self production option expected cost YearCash outflowDiscountedrate @16% PV of cash outflow 07000070000 1128000(80000+ 48000) .862110336 282000.74360826 384000.64153884 486000.55247472 578000(88000- 10000) .47637128 Total cash outflow379646 Supplier option expected cost at present value
YearCash outflowDiscountedrate @16% PV of cash outflow 1100000.86286200 2110000.74381730 3121000.64177561 4133100.55273471 5143410.47668263 Total cash outflow387225 The above stated chart clearly indicate that total cash outflow in case of supplier is 387225 and in case of self production 379646 which is lower than the other case situation. The comparison between both the options available can be drafted as the total expected outflow on the basis of present value method is less in case of self production by installing machinery (Dinçer and Yüksel, 2018). As the outflow is less than the other supplier option than it allow the entity to consume this option in order to gain competitive advantage in respective market. In context to the business decision making cost is among the most significant factor that drive the whole decision of the business entity. Limitation of financial resource is also one of the major reasons behind the prominence of cost while taking the investment related decision in business. The above projected cost structure reflect that company incurred less cost in availing the same quantity to the customer when it install the entire set up and produce by its own than approaching supplier to avail the product. This clearly state that it is more beneficial for the entity to invest in the whole set up and produce all units by its own. This will not only reduce the cost of delivering the final product but also it will improve profit of the organisation. The impact will further follow in form of increased growth rate and also strengthen the position of business in respective market. Other factors affect decision Apart from cost of producing the product there are many other factors also influence the decision making of business entity. If the organisation invests in the whole set up it will make the organisation independent when it come to producing the final unit. Also this will increase the assurance in regards to the quality of product to be delivered to end customers (El Kalak and Yamada, 2018). Further this will expand the growth possibility of business
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entity in the market. The best possibility also allows the organisation to dominate the whole market with support of best quality and economic sale price both at the same time. Question 2 Year Cash outflo w Costofcapital @10% PV value of cash outflow 0100001.00010000 1120000.90910909 2140000.82611570 3155000.75111645 4165000.68311270 The above stated chart reflects the cost incurred in different year for doing the same operation. As the cost is keep on increasing due to the inflation and other monetary factors that contribute in the price hike. The above mentioned cost chart is clearly indicating that cutting trees in the first three year are more economical than to cut after that. The present situation provide the best cost for doing the task as it incurred the least possible cost to cut the trees. As the time passes total cost of doing the same task is also increasing (Lim and et.al., 2018). The whole scenario creates a conclusion that the trees must be cut within the first few years as there after the cost will further increase. If the entity will cut the threes it will incur extra cost. The analysis of this whole situation indicates that all trees should have been cut in the first few years only. There after the cost will further increase that will further incur more losses to the entity. QUESTION 3 In process to measure the viability of this project that of seven years of expected life. This has been anticipated that the project will incur a net cash inflow of £150,000 each year
end. The inflow will further be influenced with the inflation rate that is anticipated at the rate of 6% each year with the money rate of return at 13%. In order to assess the effectiveness and economic aspect of this project Net present value technique is used to ensure the efficiency of the project (Peng and Huang, 2020). This method involves both new amount of cash outflow and the net value of projected cash inflow in order to make the investment decision making. The result of this technique is derived out of reducing the present value of cash inflow from the present value of cash outflow. Such proposal that derive the least possible net present value will be used as a favourable proposal to be anticipated. Net present value is the widely used method or technique as it provides the clear understanding about the expected level of return or benefit in monetary organisation will address in order to take the investment decision. With support of projection of the total benefit company can make its investment decision in the respective project. As all cash flows are increasing with the inflation rate, the real discount rate in the present case can be found by adjusting the nominal rate of 13%: 1 + real discount rate = (1 + nominal rate) ÷ (1 + inflation rate) = (1 + .13) ÷ (1 + 0.06) = 1.066 Therefore, real discount rate = 1.066 - 1 = .066 = 6.6% or 7% (approximately) Since real cash flows are equal for every year, we can calculate the present value of the project using annuity formula. PV= Annuity x PVIFAi%,n In the present case Annuity is 150,000 PVIFA7%,7= 1-(1+i)-n/I = 1- (1+0.07)-7/0.066 = 5.465 Using the real discount rate of 7%, the project NPV is (150,000 x PVIFA7%,7) – 800,000 = (150,000 x 5.465) – 800,000 = £19789.91
The result anticipate based on the technique of net present value is that organisation must consider this project as favourable due to the positive net present value of the proposal. The positive or favourable net present value always adds on value in the share holder worth in the whole project. Alternative solution Calculate NPV: Adjusting cash flows (CFs) for inflation Year Cash inflow inflationrate @6% Adjusted cash inflow 11500001.06159000 2150000(1.06) ^2168540 3150000(1.06) ^3178652 4150000(1.06) ^4189372 5150000(1.06) ^5200734 6150000(1.06) ^6212778 7150000(1.06) ^7225545 Year Cash inflow Discountingrate @13% PV value of cash inflow 11590000.8850140708 21685400.7831131992 31786520.6931123815 41893720.6133116145 52007340.5428108950
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62127780.4803102201 72255450.425195870 Total present value of cash inflow819681 Initial investment (II)800000 Net present value (NPV)19681 As the value of NPV is positive under both the approaches, it can be concluded that the project is financial and economically feasible (Ranjan, Gupta and Gupta, 2020). Thus, the company should accept the project. This can be stated that both the projects look feasible for the entity as both derive the positive value of net present value against the original investment has been made in the proposals. CONCLUSION Net present value is method that is used to assess about different investment option available in front of the entity. Under the net present value technique such options are selected that derive the most positive net present value out of deducting the potential out flow at the present vale from the cash inflow at the present value. In the finance decision making is taken based on the cost incurred. Such decisions are taken that can offer the least possible cost to deliver the same task.
REFERENCES Books and Journal Dinçer, H. and Yüksel, S., 2018. Financial sector-based analysis of the G20 economies using theintegrateddecision-makingapproachwithDEMATELandTOPSIS. InEmerging trends in banking and finance(pp. 210-223). Springer, Cham. El Kalak, I. and Yamada, K., 2018. The Declining Power of Business Groups and Firms’ Financial Decision-Making.Available at SSRN 2830850. Lim, T. S. and et.al., 2018. A serial mediation model of financial knowledge on the intention to invest: The central role of risk perception and attitude.Journal of Behavioral and Experimental Finance.20. pp.74-79. Peng, X. and Huang, H., 2020. Fuzzy decision making method based on CoCoSo with critic forfinancialriskevaluation.TechnologicalandEconomicDevelopmentof Economy.26(4). pp.695-724. Ranjan, S., Gupta, R. and Gupta, A., 2020. Artificial Intelligence in Financial Acumen: Challenges and opportunities.Cosmos Journal of Engineering & Technology.10(1). pp.23-27.