FINANCIAL MANAGEMENT

Financial Management



Financial Management

To,

The Chief Officer of Plc Company

8th September, 2013

Introduction

The primarily goal of effective management is to undertake all those projects and opportunities that enhances value of shareholders. Moreover, this should be noted that the amount of capital and new project duration is limited, for this management utilizes capital budgeting techniques for determining the yield of the project i.e. return over an appropriate time period. When companies make investment decision whether to expand current projects, purchasing new equipment or land/property or strategic acquisition, this decision is basically depends on the future cash flows produced by the project. Beside this, management also looks for whether these future cash flows wroth the up-front investment.

Here, Time Value of Money concept take place which an important aspect of investments appraisals/analysis. The focus of this paper would be on appraising the investment project using investment appraisal techniques i.e. Net Present Value - NPV, Internal Rate of Return - IRR and Payback Period - PBP and recommending to Directors whether company should undertake the project or look for other opportunities.

Discussion

Investment in projects engross huge amount of resources and any wrong decisions might impact on overall performance of the company and such decisions can also turn out to be very expensive when correcting them. This is managers' responsibility to compare and appraise alternative projects so that limited resources can be allocated and firm can maximize their wealth (Brigham, 2011, p. 327). Management has been utilizing Basic techniques which are as followed:

Source: Brigham - Financial Management

XYZ Plc Investments Appraisals

Net Present Value

Net present value method consider the costs and the revenue of investment project and these cost and revenues are discounted and then compared with the initial investment made in the project. This is a popular investment technique used by management in order to analyze investment profitability. Furthermore, Time Value of Money concept reflected in NPV i.e. discounting the future cash flows which states that worth of money today is more than it is future (Peterson, Fabozzi, 2011, p. 71). This principle is due to the following reasons:

Risk: Uncertainty of money in future

Opportunity Cost: Money might be earning interest due to interest account

Discounting

The process of adjusting value of money from their present value to their future value is termed as Discounting. Interest rate is the key for discount rate and this discount rate is use in Net present value calculation. This rate is selected by businesses according to the project life and then businesses identify the discounting factor. Hence, to select appropriate discount rate is an essential element for company since wrong rate can mislead entire investment decision (wps.aw).

Rules for NPV

According to finance theory, there are certain rules for NPV on the basis of which investment decision are made. The preference of the acceptance is given to that project having positive and high Net present value, while project having negative NPV should not be taken into consideration since the stream of benefits from present value is not ...