Financial Term Paper Example | Topics and Well Written Essays - 2500 words

Financial - Term Paper Example 900,000 ?1,600,000 ?1,850,000 ?1,100,000 ?2,225,000 Discount Factor @ 12% Cost of Capital 1.00 0.893 0.797 0.712 0.636 0.567 Present Value (?5,150,000) ?803,700 ?1,275,200 ?1,317,200 ?699,600 ?1,261,575 NPV ?207,275 NPV:-?5,150,000 + ?803,700 + ?1,275,200 + ?1,317,200 + ?699,600 + ?1,261,575 = ?207,275 The Net Present Value of a company is the value of a future number in terms of today. It basically helps in finding out a project’s is profitability. It requires finding out the present value of each future cash flow discounted at a specific value, which is the cost of capital of the project given in the form of a percentage. It uses the concept of discounted cash flows. Time Cash Flow (?5,150,000) ?900,000 ?1,600,000 ?1,850,000 ?1,100,000 ?2,225,000 Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Cash Flow (?5,150,000) ?900,000 ?1,600,000 ?1,850,000 ?1,100,000 ?2,225,000 Discount Factor @ 14% Cost of Capital 1.00 0.877 0.769 0.675 0.592 0.519 Present Value (?5,150,000) ?789,300 ?1,230,400 ?1,248 ,750 ?651,200 ?1,154,775 NPV (?75,575) NPV = -?5,150,000 + ?789,300 + ?1,230,400 + ?1,248,750 + ?651,200 + ?1,154,775 NPV = (?75,575) Payback Payback = 4,250,000 – 900,000 (Yr 1) – 1,600,000 (Yr 2) = 1750000 ? 1,850,000 (Yr 3) * 12 Payback = 2 Years and 11 months This is a technique used to measure the feasibility of projects in terms of the number of years that it takes to pay back an initial investment. It is measured in number of years till full recovery and the following formula can be used to measure it. Payback = No. of years prior to full recovery + Unrecovered cost at beginning of year/Cash flow during full recovery year. Payback basically represents the period of time during which the initial investment gets recovered. IRR: To calculate IRR, a negative NPV would be calculated. Hence a discount factor of 14% is selected. IRR = LDR + [PV1/PV1-PV2]* (HDR-LDR) LDR = Lower Discount Rate HDR = Higher Discount Rate Pv1 = Present Value at Lower Rate of Return Pv2= Pre sent Value at Higher Rate of Return IRR = 12% + [207,275/ 207,275 – (-75,575) * (14% - 12%)] IRR = 13.46% IRR is the value where the NPV is equal to zero. It is the optimal value where a project is most beneficial. IRR can gauge the profitability of a proposed investment by taking into consideration the concept of discounted cash flows. IRR is not very easy to be calculated as any other accounting measure such as NPV and if done then it does not give accurate answers. It is done on a trial and error. b) Provide a rationale for your treatment of initial research, depreciation and working capital, supporting your answer with links to theory briefly indicate other considerations which might also affect the decision Initial research would not be included within the Net Present Value (NPV) calculation. This is because the initial research cost had already been incurred before starting the project hence the cost was deemed to be a sunk cost. Sunk costs are not to be included within the NPV calculation because these costs have already been incurred and that do not affect the decision of either commencing or aborting any business plan. Depreciation costs do not get included within the calculation of NPV. This is because depreciation is a non-cash item and the NPV purely constitutes cash related items with respect to the time value of money. Although depreciation expense is only included within the NPV calculation in order to ascertain the Tax savings. The tax savings on allowances allowed by the tax authorities are only included