FOUNDATION OF FINANCE

Foundation of finance



Foundation of finance

Question a)

To:John Smith, Timothy, Lee, & Yin

From:ABC, CEO XYZ Limited.

Subject:Task Force for project evaluation.

26 November 2013

Dear all,

As we know that our company is operating in good environment and we are enjoying profitable operations of company. The company is willing to expand its operations by investing in new projects. For this we have received initial draft of business opportunity that is found appropriate for the business with initial investment cost of £10,000,000. Company is willing to take such opportunities but at current state we are unaware of the risk associated with the project.

For this reason I have decided to develop a task force that will be studying projects and evaluate them on basis of different information provided to them. All of the team members of task force need to be very effective in determining and evaluating the underlying benefit of the project as business's profitability is associated with it. Below is the detail of team members of task force along with their duties in this regards.

John Smith who is business graduate will find different projects that seems viable to our current scenario and benefit us in term of market opportunities and benefits to company.

Timothy and Lee will be working on projects financial benefits and uses various appraisal methods to evaluate the project possible benefits.

They all work with Yin in developing the final report to the management. This will not only increases the effectiveness in selection of project and we will rest assure that project will be a success.

In addition to this, task force will be operational from next week and start on the project which is mentioned above.

Hope every body in the task will perform their best to get maximum benefit to the organization success. For any queries feel free to contact undersigned.

Regards,

ABC, CEO XYZ Limited

Question b)

Net present value

Net present value or NPV in short is explained as the difference among discounted cash flows of project i.e., cash outflows are subtracted from cash inflows. In this appraisal method a project is considered viable when the positive NPV results from projected cash flows. While any project with negative NPV is rejected as the returning values of the project is lower than its investment in present value of time (Besley & Brigham, 2007, pp 115-125).

There are several advantages associated with NPV which are as follows:

For evaluation of project with NPV it requires entire cash flows of the project into consideration.

In evaluation of project with it requires considering factor of time value of money for effective evaluation.

For calculation of risk cost of capital is also used in NPV.

Disadvantages of net present value are:

Cost of capital in NPV is an estimated value; it sometimes does not reflect the real scenario.

The evaluation of project with NPV is done in currency value and it does not illustrate the real condition of benefits for large projects.

It does not provide accurate picture if two or more investment decisions needs to be evaluated with variance in the life of the ...