Financial Decision Making

Financial Decision Making

Tabel Of Content

INTRODUCTION1

DISCUSSION1

TASK 1: ATKINS PLC NEW SOLARIUM TO INSTALLATION DECISION1

Case Scenario1

Net present Value1

Internal rate of Return1

Option 12

Net Present Value of the Project2

IRR of the project2

Option 23

Net Present Value of the Project3

IRR of the project3

Comparison of Two Options4

Recommendation4

PART 2: ATKINS & CLARKE FINANCIAL PERFORMANCE5

a) Ratio Analysis of Atkins Plc5

b) Measure for Improvement in Company Financial Performance6

Charge on Cash6

Inventory Management7

Debtors' management7

Suppliers7

Grow income7

Controlling Expense8

c) Possible sources of finance available and the implications involved9

CONCLUSION11

REFERENCES12

APPENDIX14

Financial Decision Making

Introduction

This paper has been divided into two tasks. In first task, the basic focus will be on investment techniques i.e. the analysis of a service sector operational situation, the application of appropriate financial decision techniques and the production of appropriate recommendations. In the second task, discuss would be on developing and recommending a financing decision based upon the analysis of the financial strategy and performance of a service sector business.

Discussion

Task 1: Atkins PLC New Solarium to Installation Decision

Case Scenario

Atkins PLC is considering purchasing of a new solarium to install within each of their facilities. There are two options available and these two options will be evaluated using investment appraisal Techniques. Considering this factor, the most appropriate techniques are Net present Value and Internal rate of Return.

Net present Value

Net present Value demonstrates present value of future cash flows. This method is used in capital budgeting in order to see the profitability of the investment in the project. There are certain rules for NPV on the basis of which decision are made. These decisions are whether to accept or reject the project. According to finance theory, Net present value having a positive value means that this project will add value to firm or increase company overall profitability such projects are accepted while, project having negative NPV states that this project will subtract value from firm and such project should be undertaken (Moyer, James, Ramesh, William, 2012, p. 365-67).

Internal rate of Return

Internal rate if return is a discount rate at which present value of future cash flows from projects is zero. In other words, Internal Rate of Return is an interest rate at which negative cash-flows of an investment i.e. net present value of cost is equal to the positive value from an investment i.e. net present value of revenue. This rate is employed in capital budgeting for the purpose of measuring and comparing investment profitability (Brigham, Ehrhardt, 2012, p. 370-375).

Option 1

Net Present Value of the Project

Option 1

Years

Cash flows

Discount Factor -6%

Discounted Cash flows

Year 0

-£ 20, 000

1

-£ 20, 000

year 1

£ 8, 000

0.943396226

£ 7, 547

year 2

£ 12, 000

0.88999644

£ 10, 680

year 3

£ 6, 000

0.839619283

£ 5, 038

year 4

£ 4, 000

0.792093663

£ 3, 168

year 5

£ 2, 000

0.747258173

£ 1, 495

 

 

Present value of cash Inflows

£ 27, 928

 

 

Initial Investment

-£ 20, 000

 

 

NPV

£ 7, 928

IRR of the project

Formula:

Positive value Rate + (Positive Value figure of NPV) + Rate Difference

Positive + negative value Figure of NPV

Net present Value at 6%

£ 7, 928

Net present Value at 25%

-£ 554

Net present Value at 20%

£ 1, 205

= ...