Financial Analysis



Financial Analysis

Net Present Value

The Net Present Value (NPV) is the most popular method used, when evaluating investment projects in the long term. The net present value is used to determine whether an investment complies with the basic financial objective or not that is to maximize investment. The Net Present Value determines if the investment may increase or decrease the value of Stock Holder Wealth. This change in the estimated value may be positive, negative, or remain the same. If it is positive it means that the value of the firm will have an increase equal to the amount of Net Present Value. If it is negative, than it means that the firm will reduce its wealth in the value PN. If the result is zero NPV, the company will not change the amount of its value. It is important to note that the value of net present value depends on Initial Investment/Prior Investment, Discount Rate and life of the project.

The process of decision-making in any institution depends on the existence of more than one alternative available to the administration and management to choose a suitable alternative that can achieve a higher return and less expensive, and comes through a process of evaluating alternatives available, a work that is considered the heart of the work of management accounting. The assessments of alternatives in the current budget on profitability in the short term, but in the capital budget, projects do not achieve a quick profit in the short term. Therefore, assessment is based on the use of several methods and different models choose from the method that fits with the nature of the project and its possibilities.

This method is based on the techniques of discounted cash flow (DCF) is a method for evaluating proposals for capital investment by obtaining the present value of net cash flows in the future, discounted at the cost of capital company or the required rate of return. The techniques of discounted cash flow (DCF) are methods to evaluate investment proposals that employ concepts of the value of money over time, two of these are the net present value method and the method of internal rate of return.

For the implementation of this approach comes from the following: Find the present value and each cash flow, including many inflows as output, minus the capital cost of the project. Add up these discounted cash flows, this amount should be defined as the projected NPV.

Year

Cash Flow

0

($3,219,000)

1

350,000

2

939,000

3

1,122,000

4

500,000

5

900,000

PV of CF = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 + CF4 / (1+r)4 + CF5 / (1+r)5

PV = 3,270,784.59

NPV= 51785.04

The Net Present Value of the project is positive, which means that the project is an attractive one for the company, and it could increase shareholder's value.

Mergers and Acquisitions

The term merger and acquisition (M&A) are commonly used interchangeably while the terms merger and acquisition hold somewhat different meaning. When one company takes over another and has a controlling interest in the minority organization the purchase ...