GAA6004 - Advanced Financial Management

Running Head: Financial Management
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Project Report: Financial Management

Financial Management
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Contents
Task A...............................................................................................................................3
Question 1.....................................................................................................................3
Question 2.....................................................................................................................3
Question 3.....................................................................................................................4
Question 4.....................................................................................................................4
Task B...............................................................................................................................6
Question 1.....................................................................................................................6
Question 2.....................................................................................................................6
Question 3.....................................................................................................................7
Question 4.....................................................................................................................8
References.........................................................................................................................9
Appendix.........................................................................................................................10

Financial Management
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Task A:
Question 1:
Calculation of payback period and net present values:
On the basis of the given case, the capital budgeting techniques have been applied on
both the companies in order to evaluate the best option for company’s growth and
profitability position. Payback period and net present value of the company has been
calculated to measure the best investment proposal for the company. On the basis of
calculation on machine A, it has been found that the NPV of machine A is OMR 17,143.52. It
depicts that the net present value of machinery is positive and explains that it would offer
better return to the company. As well as, the payback period of machinery A is 2.32 years
which depicts that the invested amount would be got back by the company in 2.23 years. Rest
the period, company would be able to make new profits (Higgins, 2012).
Further, the same calculations have been done on Machinery B in order to identify the
performance of Machinery B and compare it with Machinery A. On the basis of calculation
on machine B, it has been found that the NPV of machine B is OMR 7,547.38. It depicts that
the net present value of machinery is positive and explains that it would offer better return to
the company. As well as, the payback period of machinery B is 3.12 years which depicts that
the invested amount would be got back by the company in 3.12 years. Rest the period,
company would be able to make new profits (Kelly, 2012).
On the basis of the comparison study, it has been recognized that the machinery A is
better than Machinery B in terms of the net profit as well as the total time period in which, it
would be easier for the management of the company to get back the total invested amount
through the cash inflows. The calculations of both the machineries have been given in the
appendix.
Question 2:
If according to the case, the machinery A is taken on finance lease than the outflow of
the company will be changed and it would affect on the capital budgeting decisions of the
company. On the basis of the calculations, it has been measured that whether the business
should take the machinery on lease or should but it. The capital budgeting techniques have
been applied again on both the choices and it has been recognized that the overall outcome of
the machinery would be changed.

Financial Management
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On the basis of calculation on machine a (financial lease), it has been found that the
NPV of machine A would be OMR 19,449.67. It depicts that the net present value of
machinery is positive and explains that it would offer better return to the company. As well
as, the payback period of machinery A is 0.83 years which depicts that the invested amount
would be got back by the company in 0.83 years. Rest the period, company would be able to
make new profits.
On the basis of the comparison study, it has been recognized that the machinery A on
lease is better option than buy of machinery A in terms of the net profit as well as the total
time period in which, it would be easier for the management of the company to get back the
total invested amount through the cash inflows (Krantz, 2016). The calculations of both the
machineries have been given in the appendix.
Question 3:
Operating and financial lease as a source of finance:
Operating lease and financial lease are the part of lease which is chosen by the
company on the basis of their requirement. In case of operating lease, when a company needs
any equipment for short time period than it is a better option. The leasing company give the
equipment for short term period in consideration with lease rent and then they wish to sell it
out as second hand after leasing period to other party. On operating lease, equipment is leased
by the company for 2-3 periods which is lesser than the actual time period of the machinery.
This kind of assets are not shown in the balance sheet of the company instead of it, the entire
lease cost of the machineries is shown in the income statement of the company on
expenditure side (Kinsky, 2011).
Whereas, in case of financial lease, it has been found that this lease is the alternative
of hire purchase in which the leasing company recovers the total cost of the machinery from
the company who has taken the equipment on lease. In this case, the company does not own
the machinery but most of the risk and rewards are hold by the leased company. The
company is holding responsible for insuring the assets, maintaining the assets etc. After the
end of the lease time period, business can sold it as second hand property (Madura, 2014).
These assets are shown in the statement of financial position of the company on assets side
and all the other expenses are shown in the income statement of the company.
Question 4: