University Assignment: International Financial Management Analysis

This assignment solution for International Financial Management covers key concepts such as investment appraisal, capital budgeting, and financial decision-making. The solution analyzes a case study involving in-house production versus outsourcing, utilizing techniques like Net Present Value (NPV) to determine the most financially viable option. It also explores factors influencing investment decisions beyond profitability, including payback periods, risk assessment, market uncertainty, technological advancements, employee skills, and government regulations. Furthermore, the solution addresses scenarios related to harvesting woodland and evaluating the suitability of a long-term project using both real and nominal discount rates to calculate NPV and determine project feasibility. The assignment emphasizes the importance of financial management in achieving organizational goals and making informed investment choices.

International Financial
Management

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

INTRODUCTION
The financial management accounts for implementation of various managerial
functions in order to effectively manage and handle the financial resources of an
organization. It focuses on determining the areas which is beneficial for the organization in
contrast to what can pose as a weakness for the company. It has an important role in respect
to effectively and efficiently carrying out the business which will help in business in taking
informed decisions. The current report presents about the application of the various
theoretical models and the techniques in regard to financial management which assists in
undertaking the decision-making process. It also covers the methods through which various
investment related decisions are taken.
QUESTION 1
Curt plc is facing the issue with its supplier for the component widgets of which it is
increasing price by 10% every year. Based on the organization’s expertise, it proposes the
idea to produce the widgets in-house by purchasing the machine tools and other equipment.
The compete analysis of the proposal is carried out below which will help in undertaking the
decision whether the company should produce the component in-house or avail it from its
suppliers.
Year
Cash
outflow
under In-
house
productio
n
Discounting rate
@16%
PV
value
of cash
inflow
0 -70000 1 -70000
1 -80000 0.862
-
68965.
5
2 -82000 0.743
-
60939.
4
3 -84000 0.640
-
53815.
2
4 -86000 0.552 -47497
5 -78000 0.476
-
37136.
8
Total PV of cash
outflow
-
338354
Loss of income -48000
Total cash outflow
-
386354

Year
Cash
outflow in
case of
outsourcin
g
Discounting rate
@16%
PV
value of
cash
inflow
1 -100000 1
-
86206.9
2 -110000 0.862
-
81747.9
3 -121000 0.743
-
77519.6
4 -122100 0.640
-
67434.7
5 -146410 0.552
-
69707.7
Total PV of cash
outflow -382617
It can be inferred from the above tables that the cash outflow under both the
situation is higher but under case two where the component is acquired from the supplier the
total cash outflow is £382617 which is lower than the case if in-house production is done by
the company which is £386354. Thus, it can be stated that the company should not proceed
with the in-house production of widgets.
Factors having an influence over this investment related decision
Apart from the profitability there are various other factors having an influence over
the investment decisions of the businesses. Other than the profitability and cost there are key
other aspects which should be accounted for in order to ensure better and effective decision
resulting into desired outcome. It is consistent and common that the financial manager will
always look for the way in which the investment will result into maximum benefits to the
business. This can be attained by determining and evaluating other factors as well
(Kengatharan and Clamenthu, 2017). Apart from profitability, the manager should consider
determining the payback period which is the timeframe in which the company would be able
to recover the amount invested into the project. This is an important capital budgeting
technique which assists the organization in taking better and quick decision as lower the time
better it is for the company as it reduces the risk level. This approach is helpful under the
situation when there is multiple projects only one is required or two is needed to be selected
because of limited availability of funds. In addition to this, it is crucial for the managers to
analyse the risk factors attached with the project which will assist in determining the level of
risk the company can take and thus, works on minimizing the risks.

On the other side, there are non-financial aspects as well which are having the same
importance pertaining to the decision making. One of the crucial factors is the market
uncertainty which makes it important for the finance manager to effectively analyse and
evaluate the market conditions along with the trends which are coming up which assists in
taking correct business decisions. In addition to this, the rapid upgradation in the technology
is having an equal relevance pertaining to investment decisions. If there is an expected
change in the technology in the future which will result into having the existing machinery of
no use then it will lead to incurring huge loss for the company. Thus, technological factor
also has an important role in making apt and better decision (Baum, Crosby and Devaney,
2021). Another factor is the skills, knowledge and experience of the employees which makes
it possible for the organization in successfully implementing and achieving the objectives. If
the company is willing to buy new technology and equipment then it will require the worker
who is having expertise or knowledge in working with the new technology. So, under the
situation if the current group of employees are having no clue about how to operate the
machinery or tools then it will result into incurring additional cost for the company as it will
then require hiring new employee with the relevant expertise (Konstantin and Konstantin,
2018). The last factor is the government laws and regulations which should be kept in mind
while making an investment as any non-compliance with it that might result into bringing in
legal actions against the company.
QUESTION 2
As given in the question, Clipper owns 100 acres of woodland and is under the
dilemma when it should be harvested in order to gain better and higher returns. The cost of
capital is taken to be 10% based upon which the cash inflow is converted to its present value
which is being presented below.
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
It can be inferred from the above that it is beneficial for Clipper to harvest the tress
in the year 3 which will assist in deriving higher cash inflow.

QUESTION 3
To decide if it is suitable to make an interest in a task which is of 7 years of life
expectancy. It is normal that the task will return the net income of £150,000 every year end.
The cost will confront the expansion rate which is expected at the 6% every year with the rate
of return at 13%. For deciding the reasonability of the venture NPV method is being utilized
which is the most generally utilized and famous methodology in endeavour speculation
related choices (Willigers, Jones and Bratvold, 2017). It is essentially dictated by diminishing
the aggregate sum of income from the aggregate sum of net present worth of money outflow.
Assuming the sum inferred is positive, it is ideal and the organization should pull out all the
stops as far as venture and then again, in the event that the sum determined is negative, it
implies that the task proposition isn't helpful for the organization. It is being given that all the
cash flow will rise at the same rate of inflation, therefore, the real discount rate is to be
derived by making an adjustment to the nominal rate of 13%.
Real discount rate = (1 + nominal rate) ÷ (1 + inflation rate) - 1
= (1 + .13) ÷ (1 + 0.06) -1
Real discount rate = 1.066 – 1 = 0.066 or 6.6%
Therefore, real discount rate = 6.6% (approximately)
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 organization should take up the undertaking as the NPV of the venture is
positive which shows that the task will result into expansion in the investor'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
As the worth of NPV is positive under both the methodologies, it very well may be
inferred that the task is financially practical. Consequently, the organization ought to
acknowledge the undertaking.
CONCLUSION
It can be summarized that the financial management is very much essential for the
organization in order to effectively managing the financial resources along with effective
application of the same in attaining higher return and success. The various techniques of
investment appraisal like NPV which is being used above helped in undertaking better
investment related decisions. In addition to this, various other factor which can have impact
over the decision of the company is evaluated along with its effect on the decision.

REFERENCES
Books and Journals
Baum, A. E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley
& Sons.
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.
Konstantin, P. and Konstantin, M., 2018. Investment appraisal methods. In Power and
energy systems engineering economics (pp. 39-64). Springer, Cham.
Willigers, B. J., Jones, B. and Bratvold, R. B., 2017. The net-present-value paradox:
Criticized by many, applied by all. SPE Economics & Management. 9(04). pp.90-
102.