Analysis of Financial Management Decisions for Curt plc

This report delves into the core principles of financial management, focusing on investment appraisal, capital budgeting, and decision-making processes within a company. It begins by outlining the fundamental aspects of financial management, emphasizing its role in planning, organizing, and controlling a company's financial activities. The report then provides a detailed analysis of a case study involving Curt plc, evaluating whether the company should produce widgets in-house or outsource production. This analysis includes a comprehensive cost comparison using present value calculations and considering factors such as discount rates and inflation. Furthermore, the report examines the optimal timing for cutting trees to maximize cash inflow, employing present value techniques to determine the best investment strategy. Finally, the report assesses the viability of a seven-year project, utilizing the Net Present Value (NPV) method to determine its financial feasibility and the potential impact on shareholder wealth. The report concludes by summarizing the importance of sound financial management in making informed investment decisions, considering both financial and non-financial factors, and their influence on business operations.

International Financial
Management-1

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
QUESTION 1.............................................................................................................................3
QUESTION 2.............................................................................................................................5
QUESTION 3.............................................................................................................................5
CONCLUSION..........................................................................................................................7
REFERENCES...........................................................................................................................8

INTRODUCTION
Financial management basically refers to the planning organising and controlling the
financial undertakings of the company. It involves the application of the principles of
management in regard to the financial assets of the company and in addition to this, plays an
important role in handling and manging the finance of the company in the process of
undertaking the strategic business decisions. This report basically involves critically
evaluating the various theoretical models and framework pertaining to the financial
management along with the application of the methods and techniques for undertaking
financial decisions. It will involve providing solution to the investment related questions.
QUESTION 1
In order to determine, whether Curt plc should produce the widgets itself or in-
house, the expenditure which will be incurred under both the situation is needed to be
accounted. The below table represents the total cash flow from the business in case the Curt
plc decides to produce widgets for itself.
Year
Cash
outflow
under In-
house
productio
n
Discounting rate
@16%
PV
value
of cash
inflow
0 -70000 1 -70000
1 -80000 0.862068966
-
68965.
5
2 -82000 0.743162901
-
60939.
4
3 -84000 0.640657674
-
53815.
2
4 -86000 0.552291098 -47497
5 -78000 0.476113015
-
37136.
8
Total PV of cash
outflow
-
338354
Loss of income -48000
Total cash outflow
-
386354
The below table illustrates the amount of expenditure which will be incurred under the case
of outsourcing the same to the supplier. It incorporates the expected increase in the prices of

the component widgets by 10% which will be followed for the next 5 years. Based upon this
assumption, the present value of the expenditure is determined.
Year
Cash
outflow in
case of
outsourcin
g
Discounting rate
@16%
PV
value
of cash
inflow
1 -100000 0.862068966
-
86206.9
2 -110000 0.743162901
-
81747.9
3 -121000 0.640657674
-
77519.6
4 -122100 0.552291098
-
67434.7
5 -146410 0.476113015
-
69707.7
Total PV of cash
outflow
-
382617
After analysing the cash outflow under both the scenarios, it can be stated that the Curt plc
should outsource the component widget as the cash flow is less under this case in comparison
to the one in which the company produces it itself. In case of outsourcing, the expected
expenditure is £382617 while in case of in-house production, it is £386354. Therefore, the
company should not produce the widgets itself.
Factors having an influence over this decision
There are number of financial and non-financial factors having an impact over the
decision-making process pertaining to the capital budgeting and investment appraisal. In
respect to the financial factor, apart from the cost element which is being discussed above in
calculations, profitability is another factor which should be accounted for (Benamraoui and
et.al., 2017). The finance manager always looks at the profits that will be generated in respect
to the project which if undertaken, only that project is selected for investment which
maximises the profit. In addition to this, there is another important factor which is payback
period which helps in determining the amount of time it will take to recover the amount
invested. This is a crucial investment appraisal technique, if the time period is less more
favourable it is considered, as the company recover the capital invested in the project and
invest the same in the other project (Lefley, 2018). This method is useful under the situation
when there are multiple projects from which one is to be selected or there is single project but
with a huge capital investment. Therefore, the payback period helps in reducing the impact of

uncertainty or the risk related to the money invested. Since, most of the finance managers of
an organization looks for maximum return over a short span of time.
In respect to the non-financial factors, which is having an equivalent impact over the
decision-making process. Such factors are taken into consideration by the managers at the
time of taking decisions. The rapid upgradation in the technology is the most crucial factor
having an impact over the investment decisions. The company requires to the effectively
analyse the market which will affect the decision as the market is full of uncertainty and after
making the investment if the market changes and there is no need of that component for
which the equipment is purchased then it will be of no use and will incur expenditure for the
company (Verma and et.al., 2021). Mainly the manager will look out the current technology
presence in the market and benefits it will bring to the business before making any sort of the
decision in relation to investment. Another important factor is the knowledge and skills of the
employees in order to attain the desired objectives. If the company is having the employees
with relevant knowledge and skills in effectively making use of that technology. Under the
situation of the employees are not able to deal with it then it may result into incurring
additional expenditure for the company in respect to hiring new employees. Therefore, all
these factors play an important role while undertaking the various investment related
decisions within the organization.
QUESTION 2
For the purpose of determining the best time for cutting the trees, the expected cash
flow which will be generated in different span of time is needed to be discounted. This will
result into arriving at the present value of the cash inflow. The table below depicts the same:
Year
Cash
inflow
Cost of capital
@10%
PV value of
cash inflow
0 10000 1.000 10000
1 12000 0.909 10909
2 14000 0.826 11570
3 15500 0.751 11645
4 16500 0.683 11270
Based on the above, it can be inferred that the bets time to cut the tress is in the year 3 which
will help in attaining maximum cash inflow after considering the cost of capital to be 10%.
QUESTION 3
In order to determine whether it is viable to make an investment in a project which is
of 7 years of life span. It is expected that the project will return the net cash flow of £150,000

each year end. The price will face the inflation rate which is anticipated at the 6% each year
with the money rate of return at 13%. For determining the viability of the project NPV
technique is being used which is the most widely used and popular approach in undertaking
investment related decisions. It is basically determined by reducing the total amount of cash
flow from the total amount of net present value of cash inflow (Kengatharan and Clamenthu,
2017). If the amount derived is positive then it is favourable and the company should go for it
in terms of investment and on the other hand, if the amount derived is negative, then it means
that the project proposal is not beneficial for the company.
Since all cash flows increase at the same rate of inflation, the real discount rate in
this 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% (approximatly)
Since real cash flows are equal for every year, we can calculate the present value of the
project using the formula for annuity.
PV= Annuity x PVIFAi%, n
In this case, Annuity is 150,000
PVIFA 7%,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 PVIFA 7%,7) – 800,000
= (150,000 x 5.465) – 800,000
= £19789.91
The company should take up the project as the NPV of the project is positive which indicates
that the project will result into increase in the shareholder’s wealth.
Alternative solution
Calculate NPV:
Adjusting cash flows (CFs) for inflation
Year
Cash
inflow inflation rate @6%
Adjusted
cash inflow
1 150000 1.06 159000
2 150000 (1.06) ^2 168540
3 150000 (1.06) ^3 178652
4 150000 (1.06) ^4 189372
5 150000 (1.06) ^5 200734
6 150000 (1.06) ^6 212778
7 150000 (1.06) ^7 225545

Year
Cash
inflow
Discounting rate
@13%
PV value of
cash inflow
1 159000 0.8850 140708
2 168540 0.7831 131992
3 178652 0.6931 123815
4 189372 0.6133 116145
5 200734 0.5428 108950
6 212778 0.4803 102201
7 225545 0.4251 95870
Total present value of cash
inflow 819681
Initial investment (II) 800000
Net present value (NPV) 19681
Since, the value of NPV is positive under both the approaches, it can be concluded that the
project is financial and economically feasible. Thus, the company should accept the project.
CONCLUSION
It can be concluded from the above that the financial management is the centre of
everything. For every organization, handling of finances is the most crucial aspects as the
inability to manage it will lead to incurring loss by taking wrong financial decision. It plays
an important role in an organization pertaining to investment along with considering the key
factors which will be having a huge influence over the business functioning and carrying out
the operational activities in a better way.

REFERENCES
Books and Journals
Benamraoui and et.al., 2017. Net present value analysis and the wealth creation process: A
case illustration. The Accounting Educators' Journal. 26.
Kengatharan, L. and Clamenthu, D. P., 2017. Use of capital investment appraisal practices
and effectiveness of investment decisions: a study on listed manufacturing
companies in Sri Lanka. University of Jaffna.
Lefley, F., 2018. Dispelling the Myth Around the Financial Appraisal of Capital
Projects. IEEE Engineering Management Review. 46(1). pp.47-51.
Verma, S., and et.al., 2021. Investment appraisal and financial benefits of corporate green
buildings: a developing economy case study. Built Environment Project and Asset
Management.