Financial Mangement 1 Essay Example | Topics and Well Written Essays - 2500 words

Financial Mangement 1 - Essay Example200817000.5921006200919000.455865201013000.350455201165500.26917625242Less initial cash outlay5500258 dance step 3After now getting a negative NPV from step 2 above interpolate the resultsI. R. R = lower discounting + N. P.V at lower discounting step - NPV at I.R.R HDRrate NPV at LDR - NPV at H.D.R LDRWhere HDR = Higher Discounting Rate = 30%LDR = Lower Discounting Rate = 11%IRR = Internal Rate of Return & NPV at I.R.R = 0I. R.R = 11% + 3362 - 0 (30% - 11%) 3362 - - 258 = 11% + 17.65% = 28.65%Since the internal rate of return is greater than comprise of detonator the project should be accepted.BThe initial research cost of 500 will have to be capitalized and form past of the initial cash outlay (investment). This is because the cost can be directly attributable to the cost of the project. It is not a period cost and hence cannot be treated as a normal expense.Working capital will comprise of the free value of the plant and machinery and the a dditional capital of 1,000,000 & 5,000,000 invested on 31st Dec 2006 & 31st Dec 2007 respectively, workings capital are the financial resources which shall be availed at the end of the project life. These can be invested. They are assumed to be past and pared of the economic benefits flowing onto the enterprise. But should be captured at the end of the fifth part year. Depreciation is a non- cash item. Depreciation is not taxed. Instead the entrepreneurs are given a wear and tear allowance. It is excluded from taxation and their added back to arrive at the Net operating(a) cash flows.The following factors highly affect the earlier decision of accepting the project.a) The sales are first an estimated and do not weigh the...These can be invested. They are assumed to be past and pared of the economic benefits flowing onto the enterprise. But should be captured at the end of the fifth year. Depreciation is a non- cash item. Depreciation is not taxed. Instead the entrepreneurs are give n a wear and tear allowance. It is excluded from taxation and their added back to arrive at the Net operating cash flows.Raising finance through issuing of more shares will lower the gearing level of the firm. Gearing refers to the extent to which the assets of the firm have been financed exploitation borrowed capital. The raising of more shares will make the ordinary share capital and other equity instruments in totality to outweigh the fixed charge capital in the capital structure gearing, being a ratio of fixed charge capital vs. equity will then be lower. What would happen is that the menstruum shareholders would be diluted by an additional issue of shares.This firm has already and overdraft of 40,000 which has not been financed. Any additional borrowing would increase its financial risk. This might eventually lead to insolvency of Barnsley. It would mean that the firm will be highly geared because shall have been increased by virtue of going for the loan. In addition the lo an is short -term in nature. The providers of the loan would therefore require that it be surfaced within a short time period. This may in return affect Barnsleys working capital.Sharehold