The paper 'Faculty of Business Government and Law' is a great example of a Finance and Accounting Assignment. Multinationals are exposed to more risks than domestic firms, including agency costs, environmental constraints, regulatory constraints, political risks, cultural risk, and ethical constraints. This report will explore the methods that Vibrant can use to measure the value of the acquisition and future business outlook. According to Srivastava (2008), multinational corporations need to have a clear understanding of changes in the financial environment in order to cope with the problems and risks that arise from their operations while, at the same time, capitalizing on the emerging markets.
Multinational financial systems allow multinational MNCs to shift funds internally. Evaluating the Value of the Takeover When considering the acquisition, it is important to look at the methods that can be used to measure value for Vibrant. Investment appraisal is a method of determining if an investment is worth taking up. The following are the appraisal methods that are available for MNCs, including Vibrant Ltd (Gö tze, et al. , 2008). Payback Method This method is used to determine the time that it will take to repay the initial capital cost (Brigham & Daves, 2007).
Information about the returns of the investment is required to calculate the payback period. This method does not keep in consideration the time value of money (Kinney & Raiborn, 2011). In addition, the payback method does not consider cash flow that may be generated after the period considered for payback. Where Period can be in months, days, or weeks, the period chosen must be equal to the periods of cash flow calculation. Thus, if you calculate cash flow in months, you should also calculate the period in months. Account Rate of Return (ARR) This method compares the cost of an investment with the profit generated by the investment (Hansen & Mowen, 2007).
This method simply is a ratio of Annual return or profit to the initial cost of investment. Its simplicity offers several limitations as it requires a benchmark rate for comparison. There is no measure or initial method to determine what is the right investment return. It ignores the time value of money just like the Payback method. Net Present Value (NPV) NPV calculates the net value of the investment while taking into consideration the changing value of cash flow.
This method tries to calculate the amount needed to be invested to attain certain annual revenue in a specified period of time. The value of money will be affected by interest rates payable on a certain investment. This method is good in comparing alternative investments. NPV assumes a constant capital gearing. This rarely happens as constant refinancing of the project will be needed (Delaney, et al. , 2008). Where i = interest rate n= number of years NPV uses a process called discounting Cash flow.
Using the discounted cash flow method financial accountants can determine which investment over a long period is more profitable. This method is appropriate in evaluating different investments at the same cost. Internal Rate of Return (IRR) IRR discounts the future cash flow of a given investment to the point where the Net Value Present is equal to zero. This method gives a margin of safety in case of a decline in the rate of return. Brigham & Daves, (2009) argue that IRR’ s biggest drawback is that it can give two different IRR rates for the same period cash flow if the inflows and outflows reverse during the investment.
The method also assumes that the inflows will be reinvested during the period of investment. IRR allows financial accountants to compare the performance of two investments with different initial capital demands.
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Campbell, H., 2004, When Good Law Goes Bad: Stanley Works’ Recent Dilemma and how the Internal Revenue Code Disadvantages U.S. Multinational Corporations Forcing Their Flight to Foreign Jurisdictions, Syracuse Journal of International Law and Commerce, 31(95), pp. 95-120.
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