FINANCIAL MANAGEMENT

 

Introduction

Finance has significance in business cycle, as well as the management of Finance in an efficient way of method helps to attain the assumed objectives of investing in projects, raising shareholders value, finance raising and managing risk in order to full fill the responsibility to the shareholders, employees, customers, creditors, managers and society.

PART 1 (A)

Various Appraisal Techniques

There are various Appraisal Techniques existing and it used for the purpose to know about an investment generate value for shareholders or not. (Arnold, 2005). The Appraisal Methods are as follows.

State of the Art Techniques and Traditional Appraisal Techniques.

(A)Earning Based Measures

1. NPV (Net Present Value)

 

NPV is an important tool in the DCF(Discounted Cash Flow) and it is a standard method of appraising long term projects considering time value of money, as well as used in capital budgeting and it measures the cash flows.

The traditional Formula for NPV IS , NPV= F0 + F1/(1+K)n , the net present value derived by discounting the future net cash inflows that reflects the value of alternate choice and use of the amounts that summing them over the life of the proposal and subtracting the initial outlay.

(Vernimmen, 2009)

2. Accounting /Average Rate of Return (Return on Capital Employed)

Accounting/Average rate of return is a vital financial ratio used for capital budgeting. This ratio not considering the time value of money, it considered the return of proposed investment. ARR measures the return in percentage that how much percentage it earns out of each pound invested. If the ARR is equal or greater than the required percentage of rate of return, the proposal is acceptable. The formula for investment basis is. ARR= average annual profit (after depreciation)/initial capital investment x 100. It is simply using the financial accounting rules to

Measure the profitability of the investment and not considering the opportunity or relevant cost approach.

3. Internal Rate of Return

The IRR is an important project appraisal and it think about the time value of money, as well as it consider the rate of interest that receive if invest in a project and it explains the excess of income over expenditure  annualised percentage on the basis of the timing of the flows of cash. It represents the correct rate of interest rate earned for the investment over the useful period. It is the discount rate that provides the zero Net Present Value.

IRR=R1+ (NPV1/NPV1-NPV2 X 100)

The project appraisal and decisions is the comparison of the investment and return of the investment and the investors opportunity cost is the sacrifice of the return obtainable on the other alternative. (Arnold, 2005).

 

(B)Risk Based Measures

 

1. Pay Back Period

It is a simple and easy method of project appraisal and rarely using as primary, as a secondary method it supports the other complicated methods and it seems illogical to employ it when the examined in segregation. It is the time required for re-coupe the initial investment. The acceptance and rejection policy of the project depends on the decision of management based on the acceptable payback period decided by management and if the payback period is less than the acceptable period , accept the project and otherwise vice versa.

2.Break Even Analysis

Break Even Point is the point of cost and revanues become equal, as well as there is no profit or loss made, similarly the opportunity costs are happen and the capital received and risk adjusted.

EXPENSES = REVANUE.

Time is money and today’s one ? is better than tomorrows one ?. The sacrification and its compensation consists atleast of three elements of Time, Inflation and Risk. The rate of exchange of future consumption and present consumption is called pure rate of interest. (Vernimmen, 2009)

Inflation involved with the price of time or the interest rate needed for compensation of time that exists in between the present consumption and post-poned consumption, for that the providers has right to get compensated for loss in purchasing power and time.

Objective

The investing Activity for a proposed project and creation of wealth

Decision Inputs

 

Cash flow

Time value of money

Decision Analysis

 

Discounted Cash flow

 

Project Appraisal Technique

 

Answer

yes

No

 

 

The Assumptions made for the Calculation of the prediction of Income Statement and Cash Flow Statement of M/S. ALPHA Ltd.

1.      The cast-coal mine treated as an individual project of M/S. Alpha Ltd and all possible expenses and investments charged to the individual project.

2.      The Royalty expenses incurred in the first year J2.75 Million apportioned to four years and the initial payment is treated as Capital Investment by Head Office.

3.      The survey cost is a total of only 0.44 million and it charged in the expenses of first year of operation out of the inflow of the same year.

4.      The machinery cost of J13.75 million is a Capital Investment and the Scrap value of J2.75 adjusted with inflow of cash in the fourth year, further the provision for depreciation created every year.

5.      Wages and salaries fully charged in the first year of operation and the rest of three years reduced by J0.55 million, because for the operation of rest three years equal lent to that staff force not required and their service used for other projects.

6.      The Head Office Expenses for this project fully charged and classified into Administrative Expenses and Indirect Expenses.

7.      The interest charges are applied in each year without any adjustments.

8.      Environmental cleanup charges of J0.44 million apportioned to four years and created provision from the first year of operation.

9.      The Cost of capital taken as 12%.

10.  Ignored the taxation rules when calculating NPV such as, tax payable, tax relief and written down allowance.

11.  Scrap value adjusted with the inflow of cash in the end of the fourth year of operation.

12.  Total Initial Investment Treated as follows:-

 

Net Cash provided by Operations

21,615,000.00

Cash Flows from investing activities

 

Used For

 

Equipment

<13,750,000.00>

Pre-Paid Loyalty Expense

<2,062,500.00>

prepaid Selling and distribution

<1,072,500.00>

 

 

Net cash used in investing

<16,885,000.00>

 

13.  The Expenses for operations derived from the sale of each year.

14.  The expenses met by Head Office Accounted and considered to pay Head Office and all the cost for the project considered.

15.  The initial selling and distribution expenses treated as Capital investment by Head Office and provision create d for to set off in each year.

 

 

 

 

PREDICTED INCOME STATEMENT FOR M/S.ALPHA LTD FOR THE FOUR YERS

 

 

2011

%              

2012

%

2013

%

2014

 

%

Revenues

 

 

 

 

 

 

 

 

Sales CASTS AND COALS

10,340,000.00

100.00

10,780,000.00

100.00

9,350,000.00

100.00

6,930,000.00

100.00

 

 

 

 

 

 

 

 

 

Total Revenues

10,340,000.00

100.00

10,780,000.00

100.00

9,350,000.00

100.00

6,930,000.00

100.00

Cost of Sales

 

 

 

 

 

 

 

 

Labour Costs

2,530,000.00

24.47

2,200,000.00

20.41

2,310,000.00

24.71

1,430,000.00

20.63

Material Costs

330,000.00

3.19

330,000.00

3.06

330,000.00

3.53

2,200,000.00

31.75

Total Cost of Sales

2,860,000.00

27.66

2,530,000.00

23.47

2,640,000.00

28.24

3,630,000.00

52.38