BAFN200: Finance - Investment Strategies and Project Assessment

This report addresses key concepts in finance, including investment analysis, project evaluation, and risk management. It begins by evaluating the investment decisions related to Commonwealth Government bonds, discussing the risk-return trade-off and providing insights into whether such ...Read More

Running head: PRINCIPLES OF FINANCE
Principles of Finance
Name of the Student:
Name of the University:
Authors Note:

PRINCIPLES OF FINANCE
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Table of Contents
Question 1: Learning Outcomes 2..............................................................................................2
Agreeing or Disagreeing with the parent’s investment and concerns therewith:.......................2
Question 2: Learning Outcomes 5..............................................................................................2
Identifying and discussing Slarter & Gordons option to raise finance at this stage:.................2
Question 3: Learning Outcomes 4..............................................................................................3
Deciding which flows are relevant to take decisions for the go ahead with the new product
and explain the treatment of each:.............................................................................................3
Question 2: Learning Outcomes 3..............................................................................................3
a. Showing the cash flow of the business:..................................................................................3
b. Calculating the project net present value:..............................................................................4
c. Indicating whether NPV analysis is appropriate for evaluating a business proposal:............4
d. Identifying and discussing other methods of project evaluation and qualitative factors that
is taken into consideration:.........................................................................................................5
e. Indicating whether the business should be started:................................................................5
f.i Indicating how building for production will be used in the capital budgeting process:........5
f.ii Indicating how cost of borrowed funds will be used in the capital budgeting process:.......5
References:.................................................................................................................................7

PRINCIPLES OF FINANCE
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Question 1: Learning Outcomes 2
Agreeing or Disagreeing with the parent’s investment and concerns therewith:
The decision made by the parents regarding the investment in ‘risk-free’ 10-year
Commonwealth Government bonds is adequate, where investment is secure and adequate
returns will be provided by the bonds after the completion of the tenure. However, full
agreement is on the choice of bonds used for investment purposes, while disagreement is on
the risk concern for the bond. Being a ‘risk-free’ 10-year Commonwealth Government bond,
the investment will be having zero risk involved in investment, while the return will be
constant, where no abnormal returns could be generated from the investment. Hence,
investment of superannuation fund in ‘risk-free’ 10-year Commonwealth Government bond
will eventually account for the inflation and provide adequate retune in future (Cummings
2016).
Question 2: Learning Outcomes 5
Identifying and discussing Slarter & Gordons option to raise finance at this stage:
Slarter & Gordons has the option of raising the required finance with the help of
equity issue or bond issue. Both the measure would eventually allow the organisation to
acquire the required level of funding for their current business requirement. The use of share
issue would eventually raise the level of shares in the market deriving the per share valuation
of the organisation. Furthermore, the use of debt issue can also be conducted, where the
company needs to pay finance cost for the bonds issued to the investors. Both the measures
could eventually allow the organisation to acquire the required level of cash for smoothly
conducting their operations (Legg and Nehme 2016).

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Question 3: Learning Outcomes 4
Deciding which flows are relevant to take decisions for the go ahead with the new
product and explain the treatment of each:
The information provided for the new product valuation is appropriate, where the
company is able to detect the level of income, which could be generated from the operations.
In addition, the valuation of market research, and new machine cost is essential to detect the
level of investment, which is needed for the particular project. This eventually helps in
detecting the level of income, which could be generated from the operations. Moreover, the
use of depreciation value is also essential, where it is able to compensate for tax purposes.
This helps in increasing the level of cash flow of the project and detect the financial valuation
of the project. Lastly, the contribution value is also essential in detecting the level of income
that could be generated after deducting the variable expenses. The detection of the cash
inflow helps in detecting the total cash flow, which is used for the calculation of the net
present value.
Question 2: Learning Outcomes 3
a. Showing the cash flow of the business:
Year 0 1 2 3 4 5
Revenue $ 481,000 $ 514,670 $ 550,697 $ 589,246 $ 630,493
Production
cost
$
59,200
$
63,344
$
67,778
$
72,523
$
77,599
Marketing
cost
$
96,200
$
102,934
$
110,139
$
117,849
$
126,099

PRINCIPLES OF FINANCE
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Programmer
cost
$
300,000
$
300,000
$
300,000
$
300,000
$
300,000
Annual rent $ 30,000 $ 30,000 $ 30,000 $ 30,000 $ 30,000
Inventory $52,000
Profit $ (4,400) $ 18,392 $ 42,779 $ 68,874 $ 148,795
Hardware $ (200,000)
Inventory $ (52,000)
Total cash
flow
$
(252,000)
$
(4,400)
$
18,392
$
42,779
$
68,874
$
148,795
b. Calculating the project net present value:
Time Cash flow Discounting rate Dis-cash flow
Year
0
$ (252,000.00) 1.00 $ (252,000.00)
Year
1
$ (4,400.00) 0.85 $ (3,728.81)
Year
2
$ 18,392.00 0.72 $ 13,208.85
Year
3
$ 42,779.44 0.61 $ 26,036.89
Year
4
$ 68,874.00 0.52 $ 35,524.44
Year
5
$ 148,795.18 0.44 $ 65,039.74

PRINCIPLES OF FINANCE
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NPV $ (115,918.89)
c. Indicating whether NPV analysis is appropriate for evaluating a business proposal:
NPV analysis is relevantly adequate, where organisations are able to understand the
level if income, which could be generated from the operations of a particular project. In
addition, the evaluation also helps in detecting the level of income, which could be generated
from the operations over the period of time and increase firm value in future. Moreover, the
tome value of money is accounted in the NPV valuation, which helps in selecting the
appropriate projects for improving valuation of the organisation (Li and Trutnevyte 2017).
d. Identifying and discussing other methods of project evaluation and qualitative factors
that is taken into consideration:
The different measures such as internal rate of return, payback period and profitability
index is mainly used in calculating the financial viability of the project. The NPV valuation is
only viable with project having same investment and time, while the other investment
appraisal techniques help in supporting the limitation of the net present value method (Baum
and Crosby 2014).
e. Indicating whether the business should be started:
From the above calculation of NPV the valuation is considered to be negative, where
the business should not be started, as it will not give fruitful valuation in future.

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f.i Indicating how building for production will be used in the capital budgeting process:
The existing building value is not taken into consideration under the capital budgeting
process, while any kind of expenses that needs to be conducted for the fulfilment of the
project will be considered in the capital expenditure process.
f.ii Indicating how cost of borrowed funds will be used in the capital budgeting process:
The borrowed fund will have interest payments, which is included in the capital
budgeting process, where it is deducted from the cash inflow of the project. Hence, the
company is able to detect the total cash inflow for the project after deducting all the relevant
expenses.

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References:
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Cummings, J.R., 2016. Effect of fund size on the performance of Australian superannuation
funds. Accounting & Finance, 56(3), pp.695-725.
Legg, M. and Nehme, M., 2016. Ethics and practice management: Insolvency and
incorporated law firms: Lessons from Slater and Gordon's troubles. LSJ: Law Society of NSW
Journal, (24), p.76.
Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal
pathways for the UK electricity sector transition to 2050. Applied energy, 189, pp.89-109.