Assessment 1 Report: International Financial Management Analysis

This report, focusing on International Financial Management, addresses three key financial decision-making scenarios. The first question evaluates the choice between in-house manufacturing and using an external supplier, analyzing present values of costs to determine the most economical option for Curt Plc. The second question assesses the optimal timing for harvesting timber, using net cash flow and cost of capital to determine the year with the highest present value for Clipper. The final question investigates the viability of a project for Hose Plc, calculating the net present value (NPV) to determine whether the project's returns justify the initial investment, ultimately advising against the project due to a negative NPV. The report provides a detailed financial analysis, demonstrating the application of financial management principles in practical business contexts.

International Financial
Management - Assessment 1

Contents
Introduction..............................................................................................................................................3
Main Body...............................................................................................................................................3
Question 1............................................................................................................................................3
Question 2............................................................................................................................................5
Question 3............................................................................................................................................5
Conclusion...............................................................................................................................................6
References................................................................................................................................................7

Introduction
Financial management of a business entity involves various decisions from
identifying the need of finance to arranging for finance to repaying the cost to sourced funds.
It is a managerial level decision wherein present financial structure has to be organised and
then various opportunities to improve business scope is identified (Shapiro and Hanouna,
2019). Viability of these projects are evaluated and for profit-making projects, sources of
funds are looked. Various factors are determined while seeking source of finances such as cost
of finance, availability of source of finance, credibility of the business, repayment capability,
market conditions etc. Further, there are various applications to these sources of finances and
it is very important for business to evaluate all projects properly to employ funds at most
profit-making venture. This report is related to evaluating practical applications of these
finance sources and their applications so that most profitable ventures are selected for
business. It contains three questions. First, question is related to the decision-making situation
between financing a resource from in-house manufacturing or outside vendor. Second
question is related to decision making from different inflow options to choose one and the
final question is related to making decisions about the viability of the project and to take
decision on the basis of that viability option that whether it should be accepted or not.
Main Body
Question 1
Information provided: It has been given in the question that managing director of
Curt Plc has been considering an option to manufacture widgets within company, as it is
believed that they possess the expertise to do so and moreover, the supplier from whom they
have been purchasing up till now is increasing prices 10% annually and it is expected that this
trend will continue for another five years. To produce in-house, company would be requiring
necessary machines and tools which are going to have a life of five years and at the end of
shelf life, they can be scrap sold for 10,000 GBP. In order to divert the attention of technical
services manager to this project, she will have to abandon other projects which will further
cause loss of net income of 48,000 GBP from the other projects. Discount rate has been
provided at 16%. The company now wants to evaluate whether it should go ahead with the
plan to produce in-house or shall continue with earlier arrangements (Chandra, 2020).
In order to determine the answer for company, two-way calculation has to be done.
One, company needs to find present value for the payments made to supplier in the next five-

years. Second, company needs to find net present value for the cost to the company in case of
in-house manufacturing. These two outcomes will then be compared to determine which of
the two options are more economical for the company (Bulturbayevich and et. al., 2020).
OPTION 1: Payment to supplier
Years Payment (£) Discounting factor Present Value
1 100000 0.862068966 86206.90
2 110000 0.743162901 81747.92
3 121000 0.640657674 77519.58
4 133100 0.552291098 73509.95
5 146410 0.476113015 69707.71
Total PV Cash Outflow = 388692.05
From the above table, it can be seen that had company decided to continue paying to
supplier under earlier agreement, it would have to pay a total present value equivalent of
388,692.05 GBP.
OPTION 2: In-house manufacturing
Years Cash Outflow Discounting factor Present Value
0 70000 70000
0 48000 48000
1 80000 0.862068966 68965.52
2 82000 0.743162901 60939.36
3 84000 0.640657674 53815.24
4 86000 0.552291098 47497.03
5 88000 0.476113015 41897.95
Total PV Cash Outflow 391115.10
Less: Scrap Value 10000 0.476113015 4761.13
Net Cash Outflow 386353.97
From the above table, it can be seen that had company decided to manufacture the
widgets in-house, it would have a net cash outflow of 386,353.97 GBP.
Decision suggested: On the basis of above two answers, it is suggested to Curt Plc
that it should manufacture in-house as it is having lower cash outflow. Benefits of in-house
manufacturing are that it can be manufactured in a customised manner fit for company
purposes and that availability can be altered as it is present on-site in the company. On the
other hand, it generally is accustomed by higher cost and lack of specialists (Apte and
Kapshe, 2020). However, since in-house manufacturing in the company is cheaper for the
company and managing director believes that they possess specialists required for facilitating

in-house manufacturing, they would not have any problem in developing in-house
manufacturing facilities.
Question 2
Information provided: Clipper owns 100 acres of mature woodland and is deciding
time to harvest the trees. Potential options available are for immediate net cash flow and
subsequent annual cash flows. Cost of Capital has been provided @10%. Cost of capital is
that required rate of return which is considered necessary to make a capital budgeting project
(Petty and et. al., 2016). Best time to cut the trees has been determined below:
Year Net Cash flow Discounting factor i.e.,
Cost of Capital @ 10% Present Value
0 10000 10000
1 12000 0.909090909 10909.09
2 14000 0.826446281 11570.25
3 15500 0.751314801 11645.38
4 16500 0.683013455 11269.72
5 17500 0.620921323 10866.12
From the above table, it can be seen that there have been different cash flows for
different years and using the cost of capital as discounting factor, present value for the
different cash flows have been obtained to identify the highest amount that the Clipper can
earn out of all the options available, in the discounted form to present. In other words, all the
values in all the years have been discounted to present time so that they can be comparable
(Nowicki, 2018). In the comparable form, highest present value of all the potential cash flows
comes in the third year.
Hence, it is advised to Clipper that the best time to cut the trees has been third year so
that maximum net cash flow can be assured.
Question 3
Information provided: There is an organisation Hose Plc which is considering a
decision about undertaking a project or not. It has been provided that the initial cash outflow
for the project will be 800000 GBP for the project with a life cycle of seven years. It is
expected that project will earn cash flows of 150,000 GBP at the year end and this amount is
expected to inflate at 6% per annum further as per the general inflation rate. Money rate of
return has been provided at 13% and viability of this project is to be evaluated.
Viability of this project is evaluated below:

Year Net cash flow Discount rate Present Value
1 150000.00 0.884955752 132743.36
2 159000.00 0.783146683 124520.32
3 168540.00 0.693050162 116806.67
4 178652.40 0.613318728 109570.86
5 189371.54 0.542759936 102783.29
6 200733.84 0.480318527 96416.18
7 212777.87 0.425060644 90443.50
Total net cash flows 773284.19
Less: Initial outlay 800000
Net Present Value -26715.81
Net present value (NPV) is the difference between the present value of cash inflows
and the present value of cash outflows over a period of time. It is useful to company as it
contemplates the time value of money and aids the management of the business in the better
conclusion while it has disadvantages like it does not contemplate hidden cost and cannot be
used by the business for comparing the different sizes projects (Nkundabanyanga and et. al.,
2017).
From the above table, it can be seen that net cash flows have been inflated at the
incremental rate of 6%. Money rate of return has been taken for discounting purposes. Post
discounting the future values to bring out present values equivalent for them, it was
determined that net present value of the cash flows i.e., post deducting present value of total
cash flows from initial outlay, is negative. This negative value symbolises that total net cash
flow from the whole project in the whole project period will not be able to give as much
return to the company as initial outlay is. This makes it a loss-making project for the
company. Therefore, it is not advised to Hose Plc to undertake this project.
Conclusion
Above report contains three questions based on developing an understanding to
financial management. It can be understood from these questions that there are various reasons
for which a business requires finance. It is very important for company to understand the need
of that finance and try to evaluate cost of finance as well as return from the application of that
finance so that not only viability of that financial source and resource can be justified but also,
business of the company is taken ahead in the right direction to the path of growth and
success.

References
Books and Journal
Apte, P. G. and Kapshe, S., 2020. International Financial Management|. McGraw-Hill
Education.
Bulturbayevich, M. B. and et. al., 2020. Modern features of financial management in small
businesses. International Engineering Journal For Research & Development. 5(4).
pp.5-5.
Chandra, P., 2020. Fundamentals of Financial Management|. McGraw-Hill Education.
Nkundabanyanga, S. K. and et. al., 2017. The impact of financial management practices and
competitive advantage on the loan performance of MFIs. International Journal of
Social Economics.
Nowicki, M., 2018. Introduction to the financial management of healthcare organizations.
Health Administration Press, Chicago, Illinois.
Petty, J. W. and et. al., 2016. Financial management: Principles and applications. Pearson
Higher Education AU.
Shapiro, A. C. and Hanouna, P., 2019. Multinational financial management. John Wiley &
Sons.