Essays on Theory and Problems in Financial Management Assignment

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The paper 'Theory and Problems in Financial Management' is a wonderful example of a Finance and Accounting Assignment. WACC is an appropriate method of evaluating projects bearing in mind that companies finance is through either Equity or Debt, hence getting an average of the two sources of funding through weightage represents the true view of capital structure (Fama, 1968; Khan, 1993). This will enable management to determine the economic feasibility of projects to be undertaken as companies expect certain returns from every dollar invested. Calculation of the Net Present Value of the project.

(Rounded to the nearest dollar) The following data was used to evaluate the project to purchase new equipment as shown in table 1.1 below. Table 1.1: Project data   Year 0 $ Year 1 $ Year 2 $ Year 3 $ Year 4 $ Cash flows (17,000) 13,900 13,066 12,282 11,545 Cost of operations   2,700 2,700 2,700 2,700 Maintenance   1,100 1,300 1,500 1,700 Cash flows   17,700 17,066 16,482 15,945 Scrap Value         3,000 Additional Working Capital Recovered         1,300 Actual Cash flows   17,700 17,066 16,482 17,645 Cumulative Cash flows   17,700 34,766 51,248 68,893 Calculating interim incremental Net Cash Flows we get the results shown in table 1.2 below. Table 1.2: Incremental Net Cash Flows   End of year         1 2 3 4 Net operating revenue 17,700 17,066 16,482 17,645 Less foregone rent revenue 2,000 2,000 2,000 2,000 Less Depreciation 4,250 4,250 4,250 4,250 The net change in income BT 11,450 10,816 10,232 11,395 Tax 3,435 3,245 3,070 3,419 The net change in income after tax 8,015 7,571 7,162 7,977 The terminal incremental net cash flow for terminal year 4 includes salvage value of fewer taxes due to the sale of the asset. The expected incremental net cash flows from the project are: Table 1.3: Project cash flows   End of year           0 1 2 3 4 Net cash flows (17,000) 8,015 7,571 7,162 7,977 Using discounted cash flow method (NPV) to evaluate project feasibility, we used the formula: NPV = ∑ [Ct/{1+k}^t]-Io where; C= cash flow at the end of year K= required rate of return Io= initial cost of the project With t=1 to t=4 i. e.

n=4 (project life) The decision will be based on accepting the project if NPV > 0. Table 1.4: NPV year Cash flow PDF (13.77%) Present Values 0 (17,000) 1 (17,000) 1 8,015 0.87896634 7,045 2 7,571 0.77258182 5,849 3 7,162 0.67907341 4,864 4 7,977 0.59688267 4,761     Total PVs 22,519     Less Io 17000     NPV 5,519 Recommendation as to whether or not the project should proceed. West Coast Manufacturing Company Ltd.

should invest in the project as it has a positive NPV of $5,519 which means it will add value to company assets.

References

Fama, F. (1968). Risk, Return and Equilibrium: Some Clarifying Comments. Journal of Finance Vol. 23, No. 1, pp. 29–40

Khan, M.Y. (1993). Theory & Problems in Financial Management. Boston: McGraw Hill Higher Education.

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