FINANCIAL ASSIGNMENT

Managing Financial Principles and Techniques



Managing Financial Principles and Techniques

Answer 1

There are various sources of finance available for a business to expand its operations. The sources available for finance can be internal or external, which means the organization can expand using its own resources, or it may go for the external sources. The external sources include financing through equity or through debt financing. An organisation should decide whether to raise funds through the debt financing or through equity financing based on the amount of fund required and various other factors. (Weygandt, Kimmel & Kieso, 2009)

If the organization has decided that it would be raising funds through external financing it should decide whether it needs the funds for a short-term purpose or a long-term purpose. Short-term financing is mostly used if the organisation needs to fulfil its day-to-day operational requirements. Moreover, it is easily available because of being less risky as it would be paid in a short time. However, if the organisation requires investing in a project or is going towards massive expansion, it needs a much larger amount, which can be achieved through long-term financing only. The main types of long-term financing sources include bank loans, mortgage, debentures and issuance of shares. (Ryan & Con O'Brien, 1990)

An organisation needs to asses the types of financing sources on the basis of the amount required, how quickly is the money required, availability of the cheapest option, risk involvement and for how long is the finance required. Assessing the organisational requirements is extremely important as all the financing sources bear a cost that has to be incurred in raising funds. The organisation needs to asses its requirements and selects the best possible option of financing sources to raise funds. (Gitman, 2007)

Answer 2

Net Present Value (NPV) is the net value of a project after discounting all the cash flows to the investment year. The NPV of both the projects are as calculated:

NPV = Present Value of Outflows - Present Value of Inflows

Mark A - NPV

(1.25) + (1.25) + (1.25) + (1.25) + (1.25) + (1.25) + (1.25) + (1.25) + (1.25) + (1.25) - 1

(1.15)1 (1.15)2 (1.15)3 (1.15)4 (1.15)5 (1.15)6 (1.15)7 (1.15)8 (1.15)9 (1.15)10

(1.086 + 0.945 + 0.828 + 0.714 + 0.621 + 0.540 + 0.469 + 0.408 + 0.355 + 0.308) - 1

NPV = $5.271 million or $5,271,000

Mark B - NPV

(1.00) + (1.00) + (1.00) + (1.00) + (1.00) + (1.00) + (1.00) + (1.00) + (1.00) + (1.00) - 1.6

(1.15)1 (1.15)2 (1.15)3 (1.15)4 (1.15)5 (1.15)6 (1.15)7 (1.15)8 (1.15)9 (1.15)10

(0.869 + 0.756 + 0.657 + 0.571 + 0.497 + 0.432 + 0.375 + 0.326 + 0.287 + 0.247) - 1.6

NPV = $3.147 million or $3,147,000

Mark A - IRR

Year

0

1

2

3

4

5

6

7

8

9

10

Net Cash flow

-£1.00

1.25

1.25

1.25

1.25

1.25

1.25

1.25

1.25

1.25

1.25

Discount Factor

1.15

1.320

1.520

1.749

2.011

2.313

2.660

3.059

3.517

4.045

Discounted CF

-£ 1.00

$1.087

$0.945

$0.822

$0.715

$0.621

$0.540

$0.470

$0.409

$0.355

$0.309

NPV =

$5.271

IRR =

124.9%

Mark B - IRR

Year

0

1

2

3

4

5

6

7

8

9

10

Net Cash flow

-£ 1.60

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

1.00

Discount Factor

1.15

1.322

1.520

1.749

2.011

2.313

2.660

3.059

3.517

4.045

Discounted CF

-£ 1.60

$0.870

$0.756

$0.658

$0.572

$0.497

$0.432

$0.376

$0.327

$0.284

$0.247

NPV =

$3.417

IRR =

62.0%

The decision of whether Mark A should be installed or Mark B has to be made on the basis of the decisional costing employing the avoidable and unavoidable ...