MOD003319: Business Finance - Profit, Cash Flow, and Capital Budgeting

This report provides a comprehensive analysis of key financial concepts, focusing on the differences between profit and cash flow, the significance of working capital management, and the stages involved in the capital budgeting process. The report examines the case of Wild Frontier Builders Ltd, highlighting the importance of efficient cash flow management, effective debtors and creditors management, and the impact of poor financial decisions. It also explores the capital budgeting process, including identifying opportunities, estimating costs and cash flows, assessing risks, and implementation. Furthermore, the report discusses the Net Present Value (NPV) and Internal Rate of Return (IRR) methods for capital investment appraisal, providing insights into how EyeWatering Inc can make informed investment decisions. The report emphasizes the importance of strategic financial planning and effective working capital management to ensure business sustainability and growth.

Business Finance
Module Code: MOD003319

PART 1
The Difference between Profit and Cash Flow
Cash flows are the difference between the cash that the business receives and payments while
profitability is the dissimilarity between the income and expenditure. Profitability is not n
appraised regarding cash accounted for or expense incurred. As with the case of wild frontier
limited, it is evident that the company is not using its cash flows wisely for the benefit of its
shareholders and business continuity (Damodaran, 2010). The company invested 2000 pounds to
take owners to go and watch West Ham FC and bought VW Amarok worth 32000 pounds. This
expense is not incurred to generate profit for the business.
Operating Cash Flow
Operating cash flows deals with cash activities in the business operations whether the cash
transduction is created income or expense incurred at the time of the transaction. About wild
frontier limited, the company is having tied up capital in store inform of inventories. The impact
of high tied upon capital in the store is that the business will have less cash flow to finance its
daily operations. As a result, wild frontier limited should ensure that there is an efficient
inventory management to ensure that there no too much tied up capital in the form of inventory.
Non-Cash Income
The company may be profitable as a result of non-cash income, but the expense may portray no
effect on cash holding for the business. A company will account for income when realised under
accrual method (Henderson, 2015). When a company collects cash for the last financial period,
any cash realised will spur growth in cash of the business with no effect on profitability. Failure
of the business to collect cash from debtors may depict liquidity risk

From the case of Wild frontier builders, the company has poor debtors collection p-policy. Since
debtors take a long time to pay their debt while at the same time the company is having poor
creditors control policy. Since it is evident that the company's having An overdraft with owed
cash from building project that was undertaken by vultures estate and weasel properties in which
case, the company is in six months delay of repaying creditors, which they call for legal action
against wild frontier builders.
Growing profitability.
The concept of working capital management is important since company focus on the debtors
and credits management to guarantee effective working capital. Nevertheless, other external
factors such as legal institution and business performance or internal ethics such as organisation
structure may affect the working capital. The wild frontier builders is a family owned company
with 20 staff members with business being controlled by Neil Geezer who owns 25%
shareholding and is the son the founder. The remaining 75% owned by three sisters (Kim,
Courtney, and Chloe). The business structure for wild frontier is the risk about business
expansion and profitability since, the company is having poor capital management and poor cash
management since it is evident that the company incurred 2000 pound to taker owners to watch
west ham FC and bought VM Amarok worth 32000 pounds. All this cost are not business related
cost considering the fact that the business has not paid its supply for the last six months and are
considering suing the company and the company is also having in months bank overdraft. This is
a sign of company poor cash flow management (King, 2006).
The Importance of Working Capital Management for Wild Frontier Builders Ltd
There benefit of working capital to wild frontier builders is that the daily operations of the
business will effectively be managed and hence reduce the liquidity risk and facilitate capital

growth. Working capital is an understandable notion since it is linked to some cost of living and
thus may be understood in a personal way. The importance of working capital for wild frontier
builders is diverse, and they may be the dissimilar amount for dissimilar companies. This is as a
result of many aspects including dissimilar collection and payment policy, the timing of asset
purchase and the opportunity for business writing off some of its debts and some instance of
capital expansion that the company will undertake (Shi, 2001).
It is evident that Wild Frontier Builders Limited are having poor cash flow management, which
depicts a serious cash flow problem for the company. In this regards to saving the company from
the liquidity crisis, wild frontier builders need to ensure that there is effective working capital,
which calls for improved debtors and creditors management and correct of use of cash to
generate more income to the business. Working capital is important in accounting strategy with
the focus on the maintenance of sufficient equilibrium between current asset and liabilities of the
business.
Effective manage of cash flow will make wild frontier builders limited to cover its financial
commitment and provide the methodology of aiding the company in boosting its earning. The
management of working capital by wild frontier limited would mean that the inventory control
system is managed as well as the debtors and credits management will be effective. An efficient
working capital management many at times employs the key performance ration such as the
working capital ratio, inventory turnover ratio and the debtor collection period ratio.
What steps should be taken by Wild Frontier Builders Ltd to improve the company's
working capital management
Wild frontier builders must depict a contingency plan that will cover the unseen events while the
market leaders may control the unforeseen also. The company must have risk control process that

is based on the aims and practical point of view of the function of working capital for wild
frontier builders limited.
The company should address the use of working capital because it portrays the advantage. Cash
realised is important in the business. For this to be effective, access to information, effective
banking channel, the good link between production and Billings, internal system of moving cash
and enhanced treasury on business must be observed and manage well by wild frontier limited.
The combination of operational as well as financial skills and comprising the point of view of the
business operations and supporting the identification and implementation of the plan that will
create the short-term cash for the business. This may be realised by having the right set of staff
that is responsible for setting the targets and performance standards; they are then held
accountable for delivering. They are encouraged to be innovative and to act as an agent of the
business (William Petty, 2015). Effective despite control with the customer is significant in
resolving the cash that is locked due to dispute that is not resolved will also make the customer
resolve the legal constraint with the company such as the sales and debtors collections which in
turn will grow the business profitability due to reduction the operation cost.
The partnership with the customers instead of focusing on the specific operation will ensure that
the cash collection is effective, if feasible, supporting the company in planning g for the
inventory requirements efficiently to correlate the production and the usage rate will reduce the
level of inventory tied up in the form of capital. Working capital is few important measures of
the business operations and financial efficiencies. This aspect must form part of the business
strategic, and operational thinking for wild frontier builders limited, more efforts should be
placed on the improving the working capital management since, it will lead to efficiencies and
improved customer satisfaction.

PART 2
Understanding of the stages of the capital budgeting process and the main capital
investment appraisal methods
It is evident that EyeWatering Inc wants to make a capital investment between the two projects.
As a result, the business needs to take into consideration that the phases of the capital budgeting
process and the key capital venture appraisal approach. This is because capital budgeting s a
multi-step process that company must use in establishing the viability of the project before
making an investment decision. The capital budgeting comprise of the following five steps which
must be followed by EyeWatering Inc must observe;
Identifying and evaluating potential opportunities
The company must explore the current opportunities. It is evident that Eye watering Inc is
considering a capital expansion project, the company will consider the best capital investment
from the two and the choice of venture that should be appraised regarding cost effectiveness and
logical reality involving the two projects (William Petty, 2015). After this, the company should
then determine the current time to undertake the best project as well as ensuring that other factors
like business needs and cost of upfront are considered in the capital investment.
Estimating the operating and implementation costs
The process comprises of the estimation of the cost that the project will incur for the capital
investment to be successful. If eye-watering Inc considerer undertaking the project for an
upgrade, there is, need to embark on the initial outlay of upgrading the project in term of the
acquisition cost of new equipment while at the same time, pricing out the cost of the new
equipment from the external Sources. Eye Watering Inc should consider narrowing down the cost
of implementation on the ideal project for investment.

Estimating the cash flow
EyeWatering Inc should determine the cash flow that the project creates; the approach is by
examining the data for the similar project that was successful in the past. Where the project is
seem to generate less cash that anticipated, Eye watering Inc must consider undertaking the
practice of allotting an estimated cost saving or benefit to approve whether the plan will be
effective in term of saving on cost and monetary efficiency (Henderson, 2015).
Assessing the risk
The process of examining the risk comprise the estimation of the risk linked to the project that is
inclusive of the cash that business will risk losing in case the project turn to be unsuccessful or
the project will not create the forecasted income. Once the level of risk is ascertained, eye-
watering Inc should evaluate the project against the estimated cost or benefits of the project to
approve whether the project is realistic and be approved or rejected,
Implement
When the company approves and undertake the project, it will need implementation plan. The
plan should comprise approach of paying for the project, methodology of trailing the cost as well
as the process for recording cash flows to the benefit of the project. The implementation plan
should entail timeframe with key project milestone together with the date of project completion.
The main capital investment appraisal methods
Net Present Value Method (NPV)
The net present value estimated and discounted the cash flow and contrast with the initial capital.
The company must accept the positive NPV and reject negative NPV. Eye watering Inc must,
therefore, accept the project that will generate positive NPV. This is because; the value of the
stream of benefits is less significant in recovering the initial outlay.

Discounting rate
The discounting rate is a concept of linked NPV methodology. The discounting rate is important
in changing the cost and the advantage to present value to portray the principle of time
preferences. The working of the discounting is based on some methodology of the weighted
average method; the social discounting ate and the cost of capital for the project.
Internal Rate of Return (IRR)
This is the interest rate that the net present value of positive and the negative net present of the
project should be equal to zero. The internal rate of return is used in appraising the viability of
the project. Ion establishing the venture projects of Eye watering Inc, the company from its
opinion to accept the project where the internal rate of return is more that the required rate of
returns and hence the internal rate of return is less than the required rate of return, Eye watering
Inc should decline the project (William Petty, 2015).
The internal rate of return is normally connected to the discounting rate against which the
internal rate of return is contracted, the discounting rate correspond to the opportunity cost of
capital. The internal rate of return hence allows managers of eye-watering Inc to rank the project
by their overall rate of return rather than by their net present value and the investment with the
highest internal rate of return, which is normally deemed as the best project for investment. The
simplicity of contrasting makes the internal rate of return attractive, but there some limitation of
using the method since, the internal rate of return will be efficient for the venture that depicts an
initial outlay and cash flows.
Payback Period
This the period that is required for the amounted invested in an asset to be repaid by cash flow
realised. The approach is vital, from risk evaluation point of view since it provides the fast point

of view of the timeframe that the investment will be risky. The payback period is important in the
project in which there is a serious concern of an obsolete very fast and in which there is the full
return of the initial outlay of the project.
It is evident the eye-watering Inc that the company is going to accept the Call of the Assassins
Part XXIII project if it will depict a payback period of less than three. This is because; the initial
outlay of the project is approximated to be $10 million and the development of 2-3 years. The
basis is that eye-watering Inc will accept the project if it takes one to three years to realise the
invested capital. About investment on Coalmining & Oil Extraction, the company will only
accept this project if the project takes two years to recover the invested capital since it can be
observed that the project will incur $6 million of initial outlay with 1-2 years of development.
Modified internal rate of return (MIRR)
The modified internal rate assumes positive cash flow is reinvested at the company’s cost of
capital and the initial, cost is financed by the company’s cost of financing the project. The
traditional internal rate of returns considers that the cash flow from the project is re-invested. The
marginal internal rate of return is correct and ensures that there is a clear depicting of the cost
and the profitability of the project (Henderson, 2015).
The potential application of these methods to the projects under consideration
EyeWatering Inc
Eye watering Inc must consider on which project to undertake between the two. If the business
employs the internal rate of return method in evaluating its project, the company will only accept
the project with an initial cost being equal to zero. This implies that the project that has its
internal rate of return being more than the required rate of return shall be accepted.

The benefit of this capital appraisal method to eye-watering Inc is that the approach will help the
business in making consider on the best project to take on. It is evident that the eye-watering Inc
is need of upgrading the premise with that an initial capital cost of $10 million with to
development of 2 to 3 years. As a result, with the sue of payback period, the basis for accepting
or rejecting this project is that the company will accept the project of the internal rate of return is
more than the three years.
About the use of NPV, the company will accept the project with positive NPV amongst the two
projects. The internal rate of return (IRR) will be sued in appraising the two project what
baseline being, accept the project if it yields positive return within two years or less for
Coalmining & Oil Extraction project and three years or less for Call of the Assassins Part XXIII
Appropriate for the decision-making process for EyeWatering Inc
The NPV and IRR are deeming the best investment appraisal tool that Eye watering Inc should
use in appraising the capital investment. The NPV is important in evaluating the mutually
exclusive project, unlike the IRR. NPV approach make use of realistic re-venture rate of
assumptions, it is ideal to assign profitability and investors wealth because, it will provide a
correct accept or reject decisional in spite of the project experiencing non-normal cash flows or
where the difference in size of the project or presence of timing of cash flows (Henderson, 2015).
Conclusion
The use of IRR and the NPV in appraising the project for the company is a result of same the
findings. However, many methodologies to conclude internal rate of return is efficient, unlike the
NPV discount cash flows. The main constraint with the use of internal rate of return is that use a
single discounting in evaluating the project. Alth0ought with the use of single discounting
simplifies matters; there are many situations that cause the problem with the use of internal rate

of return. For instance, internal rate of return will be effective where there is an evaluation of two
mutually exclusive projects, the anticipated cash flow, the risk, and short time frame

Bibliography
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Henderson, S. (2015) Issues in Financial Accounting - Page 991, London: Cingage learning.
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King, A. (2006) Fair Value for Financial Reporting: Meeting the New FASB Requirement,
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Shi, J. (2001) Handbook of Financial Analysis, Forecasting, and Modeling - Page 311, London.
Tessa Hebb, .P.H..G.F.H. (2015) The Routledge Handbook of Responsible Investment.
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