Detailed Analysis of International Financial Management Assignment

This assignment delves into International Financial Management (IFM), analyzing capital budgeting techniques for investment decisions. It presents three questions, each exploring different scenarios and financial tools. Question 1 evaluates whether a company should manufacture or procure widge...Read More

INTERNATIONAL
FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
MAIN BODY.............................................................................................................................................3
QUESTION- 1...........................................................................................................................................3
QUESTION- 2...........................................................................................................................................7
QUESTION- 3...........................................................................................................................................8
REFERENCES........................................................................................................................................11

MAIN BODY
QUESTION- 1
There are two options that the company Curt plc. can implement in respect of the
component widgets, one can be that they can obtain it from the suppliers in the market who have
increased the rate by 10% every year since the past five years and the similar trend shall be
continuing in the market. Apart from this the management of the company has realized that they
can produce the raw material widgets in the company by purchasing the necessary equipment’s
and machine. The various capital budgeting techniques can be applied by the company in order
to find out whether the investment option must be accepted or rejected by the company.
The various payment made to the suppliers of widgets are as following:-
Years Payments made to the suppliers
1 100000
2 110000
3 121000
4 133100
5 146410
Total 610510
The table shows that the prices are rising by 10% every year and the total costs pertaining
to five years data is 610510.
The other option is the manufacturing of the widgets by the company which requires the
initial investment of £70000 in the acquisition of the equipment used in the process of
production. The cash flows that are generated are as follows:-
Years Cash flows
0 (70000)
1 80000
2 82000
3 84000
4 86000
5 88000
Total 350000
Calculation of the amount of depreciation:-

Initial investment= 70000
Life of the asset= 5 years
Scrap value= 10000
Depreciation= Initial investment – Scrap value / Life of the asset
Depreciation= 70000-10000/5
Depreciation= 12000
The necessary amendments in the cash flows that are generated in the manufacturing of the
widgets are:-
 Since depreciation is the non- cash expense of the business so it shall be added back to
the profits or cash inflows of the period.
 The scrap value that is generated in respect of the equipment after the useful life shall be
treated as the cash inflow in the fifth year (Sarwary, 2020).
 The attention of the technical service manager shall cause an net loss of 48000, which has
to be decreased from the cash flows that are generated in the first year of the operations.
Post making the required changes the cash flows of the company are:-
Years Cash flows
0 (70000)
1 44000
2 94000
3 96000
4 98000
5 110000
Total 372000
Payback Period
Payback period is the investment appraisal technique that is used to evaluate the
feasibility of the project in terms of recovering the amount of initial investments that are made by
the company (Gupta, 2017). It demonstrates the time in which the company recovers the amount
spend on the project. The earlier is the better in case of payback period, which is only the case of
Curt plc. who receives the amount within 1 year and 3 months.
Years Cash flows Cumulative cash flows
0 (70000)
1 44000 44000
2 94000 138000
3 96000 234000
4 98000 332000
5 110000 442000

Total 372000
Payback period= 1 year + 12/ 94000*26000
Payback period= 1 year + 3.32 months
= 1 year and 3.32 months
Net Present Value
The net present value is the technique which shows the profitability of the investment and
based on this the viability of the project can be ascertained. If the net present value is positive in
that case the project should be accepted and if it’s negative then the company is not even able to
cover the costs with the cash flows that are generated over the life of the asset (Sarwary, 2019).
In the current situation also the net present value is positive and that to by a huge margin which
shows the efficiency of the investment.
Years Cash flows Discounting factor
@16%
Present value of
cash flows
0 (70000)
1 44000 0.862 37928
2 94000 0.743 69842
3 96000 0.641 61536
4 98000 0.552 54096
5 110000 0.476 52360
Total 372000 275762
Net present value= Present value of cash inflows – Cash outflows
Net present value= 275762- 70000
Net present value= 205762
Profitability Index
The profitability index of any proposal is calculated by discounting the cash flows to the
present value and then dividing it with the amount of initial investment. It can be assessed that if
the profitability index is below 1 then it should be rejected and if it is above 1 then it should be
accepted. This investment is generating the profitability index of 3.94 which is way higher than
the required which means that the proposal should be accepted.
Years Cash flows Discounting factor
@16%
Present value of
cash flows
0 (70000)
1 44000 0.862 37928
2 94000 0.743 69842
3 96000 0.641 61536

4 98000 0.552 54096
5 110000 0.476 52360
Total 372000 275762
Profitability index= Present value of cash inflow / Cash outflow
Profitability index= 275762 / 70000
Profitability index= 3.94
Discounted payback period
Years Cash flows Discounting
factor @16%
Present value
of cash flows
Cumulative
present
value of cash
flows
0 (70000)
1 44000 0.862 37928 37928
2 94000 0.743 69842 107770
3 96000 0.641 61536 169306
4 98000 0.552 54096 223402
5 110000 0.476 52360 275762
Total 372000 275762
Discounted payback period= 1 year + 12/ 69842*32072
= 1 year and 5.51 months
Internal rate of return
The internal rate of return is one on which the investment is on breakeven where there is
neither the profit nor loss of the company. The internal rate of return for the equipment is 96%
where the company is able to recover the amount of initial investment (Siziba and Hall, 2019).
Years Cash inflows
0 -70000
1 44000
2 94000
3 96000
4 98000
5 110000

IRR 96%
Years Cash inflows Discounting factor@ 96% Present value of
cash inflows
0 -70000 1 -70000
1 44000 0.51 22440
2 94000 0.26 24440
3 96000 0.133 12768
4 98000 0.068 6664
5 110000 0.034 3740
52
The amount of 52 is the residual value otherwise it can be ascertained that at the internal rate of
return up to 96% the company shall be generating no profits but covering up the costs.
QUESTION- 2
Cash flows generated over the years if the harvest is done and on the basis of that the best
time is selected when the harvest should be made by the company:-
Year Cash flows Discounting factor
@10%
Present value of
cash flows
0 10000 1 10000
1 12000 0.909 10908
2 14000 0.826 11564
3 15500 0.751 11641
4 16500 0.683 11270
Total 55383
The returns generated in different years are:-
Years 0 1 2 3 4
Present value
of cash flows
10000 10908 11564 11641 11270
Highest 11641
This means that the company should harvest in the third year which shall provide them
with the maximum returns. So this is the best option for the company and until then it should let
the trees grow (Shaban, Al-Zubi and Abdallah, 2017).

QUESTION- 3
Initial investment= 800000
Life of the project= 7 years
General inflation= 6% pa
Money rate of return= 13%
Cash flows= 150000 plus the increase of 6% inflation rate every year
Calculation of the cash flows for the Hose plc. are:-
Years 0 1 2 3 4 5 6 7
Cash
flows
(800000) 150000 159000 168540 178652 189372 200734 212778
The above table shows that the cash flows are increasing every year by 6% that is the general
inflation rate.
The advice regarding the viability of the idea can be given in respect of various capital budgeting
techniques used by the company.
Payback period
Years Cash flows Cumulative cash flows
0 (800000)
1 150000 150000
2 159000 309000
3 168540 477540
4 178652 656192
5 189372 845564
6 200734 1046298
7 212778 1259076
Payback period= 4 years + 12/189372*143808
Payback period= 4 years and 9.113 months

Net present value
Years Cash flows Discounting factor
@13%
Present value of
cash inflows
0 (800000)
1 150000 0.885 132750
2 159000 0.783 124497
3 168540 0.693 116798
4 178652 0.613 109514
5 189372 0.543 102829
6 200734 0.480 96352
7 212778 0.425 90431
Total 773171
Net present value= Present value of cash inflows- cash outflows
Net present value= 773171-800000
= -26829
Profitability index
Years Cash flows Discounting factor
@13%
Present value of
cash inflows
0 (800000)
1 150000 0.885 132750
2 159000 0.783 124497
3 168540 0.693 116798
4 178652 0.613 109514
5 189372 0.543 102829
6 200734 0.480 96352
7 212778 0.425 90431
Total 773171

Profitability index= Present value of cash inflow / Cash outflow
Profitability index= 773171 / 800000
Profitability index= 0.966
Discounted payback period
Years Cash flows Discounting
factor @13%
Present value
of cash inflows
Cumulative
present value
of cash
inflows
0 (800000)
1 150000 0.885 132750 132750
2 159000 0.783 124497 257247
3 168540 0.693 116798 374045
4 178652 0.613 109514 483559
5 189372 0.543 102829 586388
6 200734 0.480 96352 682740
7 212778 0.425 90431 773171
Total 773171
Discounted payback period = not viable
So overall it can be assessed that the project is not advisable as the returns are not
sufficient as per net present value, profitability index and the discounted payback period
technique. The proposal must be rejected.

REFERENCES
Sarwary, Z., 2020. Strategy and capital budgeting techniques: the moderating role of
entrepreneurial structure. International Journal of Managerial and Financial Accounting. 12(1).
pp.48-70.
Sarwary, Z., 2019. Capital budgeting techniques in SMEs: A literature review. Journal of
Accounting and Finance. 19(3). pp.97-114.
Siziba, S. and Hall, J. H., 2019. The evolution of the application of capital budgeting techniques
in enterprises. Global Finance Journal, p.100504.
Shaban, O. S., Al-Zubi, Z. and Abdallah, A. A., 2017. The extent of using capital budgeting
techniques in evaluating manager’s investments projects decisions (a case study on Jordanian
industrial companies). International Journal of Economics and Finance. 9(12). pp.175-179.
Gupta, D., 2017. Capital budgeting decisions and the firm’s size. International Journal of
Economic Behavior and Organization. 4(6). p.45.