Financial Management - Carr Plc

Abstract

The report investigated different financial management approaches used at Carr Plc. In the light of given scenario, the report incorporated recommended capital budgeting techniques including NPV, IRR and payback in an attempt to appraise the proposed project. Investment appraisal analysis via selected methods suggested Carr Plc to purchase the new machinery. In addition to this, the report conducted critical evaluation of the nature of gearing and its potential effects on the financial performance of the company. In accord with critical evaluation results, the report found direct and severe effect of high gearing on the perceived risk and cost of capital of Carr Plc. Hence, the firm is recommended to be careful while incorporating the gearing strategy for the proposed project.

Key words: Financial management, Carr Plc, capital budgeting techniques, NPV, IRR, payback, proposed project, critical evaluation, nature of gearing, potential effects, high gearing, perceived risk, cost of capital, gearing strategy

ABSTRACTII

INTRODUCTION1

PART 1 - INVESTMENT APPRAISAL1

Evaluation of the Proposed Project2

Net Present Value (NPV)2

Internal Rate of Return (IRR)2

Payback Period (PP)2

Discounted Payback Period (DPP)3

Usefulness of Investment Appraisal Models3

Investment Appraisal Analysis4

Recommendation5

PART 2 - GEARING5

Nature of Gearing6

Potential Effects of High Gearing8

Gearing and Risk9

Gearing and Cost of Capital10

CONCLUSION11

REFERENCES13

APPENDIX16

Appendix A - Investment Appraisal Calculations16

Appendix B - Figures18

Financial Management - Carr Plc

Introduction

The report aims to assess financial management at Carr Plc. In the pursuit of this objective, the report divides acquired information into two parts. The first part of the report conducts investment appraisal via selective working capital techniques. In the life of explained usefulness of each selected method, the paper analyzes and recommends Carr Plc regarding the purchase of new machinery. In the second part, the report sheds light on the nature of gearing and its impact on the financial performance of the firm. In the proposed project, the paper evaluates relation between debt financing and gearing of the firm. Nonetheless, the report discusses potential effects of high gearing level on the cost of capital and perceived risk of the business. Finally, the paper provides conclusion on the critical evaluation of the available investment option and possible impact of gearing on the business performance.

Part 1 - Investment Appraisal

In the present scenario, Carr Plc is determined to increase the shareholders' wealth, which is expected to be met by the proposed investment project. According to the scenario, the firm would require to make a purchase decision for new machinery with useful life of 6 years. The decision will require the firm to incur cost of £ 120m at the current cost of capital of 12%. The project is expected to generate even cash inflows of £ 35m for the first three years and even cash flows of £ 30m for the remaining three years. The proposed project is appraised via four basic methods of investment appraisal in order to assist Carr Plc with the investment decision.

Evaluation of the Proposed Project

Net Present Value (NPV)

The proposed project will generate uneven cash flows for the coming six years. In the present case, NPV evaluation shows that the project with six ...