FINANCIAL DESIGN MAKING

Financial Design Making

Financial Design Making

Introduction

The main aim of the paper is to identify which project the company should undertake in order to have more benefit for the organization. There are two systems out of which one is to be selected to provide new intranet to the organization and other linked organization. The below discussion presents the analysis of both the project and in the end it will recommend which project is more beneficial for the organization.

Analysis of Project A

Project A aims in incorporating external services such as specialist software design company. The total cost of the project is £ 2.7 million. If this project is undertaken the total savings for the business will be £ 2300.

Year(s)

Savings per year (£000s)

1-3

500

4-5

750

6-8

550

9-10

500

Total Saving

2300

Cash flow Analysis

A cash flow statement is one of the most important financial statements for a project or business. The statement can be as simple as a one page analysis or may involve several schedules that feed information into a central statement.

A cash flow statement is a listing of the flows of cash into and out of the business or project. Think of it as your checking account at the bank. Deposits are the cash inflow and withdrawals (checks) are the cash outflows. The balance in your checking account is your net cash flow at a specific point in time (Hampton, 1976, pp. 31).

A cash flow statement is a listing of cash flows that occurred during the past accounting period. A projection of future flows of cash is called a cash flow budget. You can think of a cash flow budget as a projection of the future deposits and withdrawals to your checking account.

NPV and IRR

The net present value of project A is calculated to be £ 725,000. The internal rate of return is calculated to be 16%.

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

Net present value (NPV) is calculated based on the expected returns and the expected costs of an investment, where these expected returns and expenses are discounted by a rate that reflects inflation and opportunity costs. The process NPV / IRR analysis enables you to determine the net present value of a process. As parameters for this analysis, you can specify initial cost, expected process volume (as an absolute value), number of periods (where each period is one year), and annual discount rate. The analysis uses the weighted average cost and revenue results to determine the expected future net profits (Harrington, 1985, pp. 23).

In addition to the net present value, this analysis also determines the internal rate of return (IRR) for the process. The internal rate of return is the interest rate received for an investment, based on anticipated expenses and income that will occur ...