Financial Analysis





Financial Analysis

Answer 3

Financial managers begin their estimates of expected incremental cash flows for a proposed capital budgeting project through the assessment of cost related to Initial Investment as negative cash flows only occurs when the project is accepted with the initial investment being in the cost of the machinery, delivery and installation costs along with the investment in net working capital (NWC). This investment will not be made if the project is rejected. The estimate of expected incremental CF further takes into account Operating Cash flows (OCF) as when any capital budgeting project is accepted, only then it incurs changes in sales or expenses. It also includes changes in taxation which is also attributed to depreciation expenses, externalities and opportunity costs. As mentioned above; these costs, sales and expenses would not have emerged had the proposed capital budgeting project not undertaken. The last factor that helps in the determination of the incremental CF is the Shutdown CF, which is the cost that appears at the end of the useful life of proposed capital budgeting project. This Shutdown CF comes attached with the salvage value, taxes tied to asset sales and the reduction in the NWC.

Answer 5

NWC helps in determining incremental CF in such way that if proposed project is accepted, there would be investments required to be made into current assets and current liabilities would also be generated so as to finance capital budgeting decision. This is because the change in NWC is usually more likely to be positive when a proposed capital budgeting project is accepted as cash, accounts receivables, accounts payables, accrued wages, taxes and inventory comes associated with financing decisions for any project. For instance, if capital budgeting project is associated in mass production, company's accounts payables might increase as a result of huge order placement to the suppliers. To run the operations of a large new project, increased cash would be required with investment in inventory being inevitable. These factors associated with the Working Capital are unavoidable when incremental CF is taken into account for a proposed capital budgeting project.

Answer 7

Financing costs are incorporated into the capital budgeting analysis process for the calculation of Net Present Value (NPV) and to take decision as to whether or not to accept the project based on the Internal Rate of Return (IRR) decision rule. Although we know that selling stock or taking loan to finance ...