Question 1
Memo of Recommendation for the proposals
To
The Superior Executive
Initech
Subject: Evaluation of the proposals and the schemes
The memo has made an effort towards the making of recommendations and suggestions after the evaluation procedure of the proposals or schemes given. The two proposals related to the device part project and the conveyor system is analyzed and evaluated for the appropriate recommendations. It also takes into account the validation after proper examination of the applied methods towards the appraisal of the two proposals.
One of the best tool and method of the Capital Budgeting approach has been considered for the computation of the projects i.e. the NPV or the Net Present Value method. It is considered because of the efficiency in measurement of the projects productivity and profitability. It takes into account the estimation of the value of the proposals by the computation of differences among the inflows and outflows of cash.
The NPV method has been used for both the proposals and they have been used as under:
Device Part Project (Proposal 1)
The Net Present Value is $2,062,509.03 as per the above table.
The value calculated is positive and of a higher value, that represents a best position for the company. Thus, the proposal must be accepted as the same will leave the company in a better position.
Conveyer System (Proposal 2)
|
Option A: N= 10 years Cost = $40,000 Cash outflows = $13,000 WACC = 15% |
Option B: N= 10 years Cost = $55,000 Cash outflows = $9,000 WACC = 15% |
Option C: N= 20 years Cost = $130,000 Cash outflows = $1,400 WACC = 15% |
The total outflows of the system are $139,272.38 as per the above table.
In the above given table, the selection procedure must have the Net Present Cash outflow that has the minimum PV i.e. Present value. On the above evaluation and assessment, the system B has the minimum PV and hence, the suggestion will be the choice of system “B”. With the selection of the system, B the business will take into account the occurrences of a lower cash flow structure. Therefore, by considering the above situations, it can be concluded the system B must be selected.
Finally, the company is recommended to choose and accept both the proposals i.e. the Device Path project and the Conveyor system. The Device Path project will lead to a positive NPV while the selection of the conveyer system will result in the lowering down of the cash outflows that would enhance and increase the value of the company and its overall structure.
The Mantra Group Limited has been chosen under the discussions of the analysis of the risk involvement in the capital budgeting and it engages itself in the hotel industries. It has its headquarters in Australia and generates the majority of its proceeds under business segments that are three in number and include the Resorts, CBD and Central Revenue and distribution.
The risk duration for the purpose and motive of capital budgeting has been expected to be of about 30-35 years and it desires the overall growth in its revenue and goodwill. The method of NPV is used for assessing the proposals of expanding its projects to increase the growth. The company as per its motive in future investment has a projection of growing up its portfolio tactically associated CBD and leisure destinations in the countries of Asia, Australia and New Zealand. The cases and situations where the NPV turns out to be positive are considered feasible towards the acceptance or continuance of the project or proposal. However, the net present value has dependability upon on a variety of factors.
Question 2
A numerous range of variables have relativity on the project and its valuation towards the association of the risks with projects and the cost of capital helps in getting the discounted value of the future cash flows and the cost of capital must be more than the discounted rate of return in the projects involving uncertainty. The financial leverage is also among the most important factors of the determination of the future cash flows and in cases when the organizations have a higher leverage, the future cash flows turn to become vague and unfeasible. Further, the elevated leverage amount indicates a higher summation of obligation of debts.
The sales from the services are considered as under the proposal related to the cash flows and the incurrence of the expenditures that are incurred towards the management of the outflows of the cash. The cash flows have dependability on the demands and the economic conditions of the general commodities and products. The expenses have a probability of being constant other than cases in the development of chief works and processes. The sensitivity nature is reflected through the sensitivity analysis of the proposals and the revenues and the expenditures.
Working capital represents the variation among the full amount of the current assets and the current liabilities. For the company Mantra group limited, the data of the amount of the working capital has been collected from the annual reports and the websites of the company.
The working capital is as below:
Financial year 2015= $ 88, 00,000
Financial year 2016= $ 45, 00,000
The amount is positive that represents that the company is effective in converting the current assets in a short term or period. However, the working capital has decreased a lot and thus, the same must be managed and controlled for better effectiveness of the company.
The Cash Conversion Cycle helps in knowing the effectiveness of the entire company and its operations. Mantra Group Limited has a conversion cycle of -4.82 in the year 2016 days that means the means that the company is receiving cash before having to pay its suppliers. The lesser the ratio, the more effective will be the ratio and the funds received by the company in a early duration provides utility to the resources.
Its competitor Star Entertainment Group has a cash conversion cycle of -25.60 that represents a more beneficial ratio. Thus, the competitor is more efficient and the Mantra Group must take steps to improve the same. The principle activities of the companies are different and as Mantra Group has more payments in credit cards and check ins for the booking of rooms, there is a delay in the collection of the payments. Thus, it has a lower cash conversion cycle as compared to the competitor that provides the activities related to Casino, Entertainment, and hotel too. Hence, both the companies are maintaining a good position and have a great hold on the Industry.
A short ranged note of promissory that is issued by the business and has a primary usage of the inventory and accounts receivables funding. It is also used towards meeting up the liabilities of short term and it has the use of depicting the position of the company in having an inadequate finances and resources of short term for the payment of the short-term liabilities.
The liquid assets are utilized in an appropriate manner to lower the risk of credit of the company and thus from the above analysis and discussions it can be said that the use of the commercial papers can increase and augment the value of the credit and help in building up of the higher ratings of the company.
The company that borrows the assets having a current use has a usage of the asset financing policies. The Telstra Company uses the policy of utilization of the loans of short-term nature for the asset financing of the company. It is also able and capable of diminishing the cycle of cash conversion for the reduction of the obligation of working capital. The decrease in the working capital will increase the efficiency and decrease the cost and thus it is recommended towards adopting the improvement policies. The centre of attention for improvement must be on the cash conversion cycle so as to supply more profit to the company (Telstra.com.au. 2017).
Further, the company Telstra has the policy of following the structure of the Debt oriented capital. The policy is towards reducing the levels of the risks and other hazards. The adoption of the policies of finance has lead to the growth and development of the higher spending of capital and has a major influence on the productivity, efficiency of administration and its financial power.
Reference List
Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting. In Entrepreneurial Finance for MSMEs (pp. 293-320). Springer International Publishing.
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.
Bodie, Z., 2013. Investments. McGraw-Hill.
Covitz, D., Liang, N. and Suarez, G.A., 2013. The Evolution of a Financial Crisis: Collapse of the Asset?Backed Commercial Paper Market. The Journal of Finance, 68(3), pp.815-848.
Daunfeldt, S.O. and Hartwig, F., 2014. What determines the use of capital budgeting methods? Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4), pp.101-112.
Dellavigna, S. and Pollet, J.M., 2013. Capital budgeting versus market timing: An evaluation using demographics. The Journal of Finance, 68(1), pp.237-270.
Grob, H.L., 2013. Capital budgeting with financial plans: an introduction. Springer-Verlag.
Kahl, M., Shivdasani, A. and Wang, Y., 2015. Short?Term Debt as Bridge Financing: Evidence from the Commercial Paper Market. The Journal of Finance, 70(1), pp.211-255.
Saunders, A. and Cornett, M.M., 2014. Financial institutions management. McGraw-Hill Education,.
Taha, H.A., 2014. Integer programming: theory, applications, and computations. Academic Press.
Telstra.com.au. (2017). Telstra – mobile phones, prepaid phones, broadband, internet, home phones, business phones. [online] Available at: https://www.telstra.com.au/ [Accessed 30 Apr. 2017].
Zhang, Q., Huang, X. and Zhang, C., 2015. A mean-risk index model for uncertain capital budgeting. Journal of the Operational Research Society, 66(5), pp.761-770.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
