Financial Performance Analysis And Investment Decision Making

Financial Tools for Investment Decision Making

Question:

Discuss about the Analysis of Investment and Investment Tools.

This report reflects the key understanding on the financial performance of company and how financial tools could be used to gauge the financial performance of company. There are several financial tools such as net present value, profitability index, ratio analysis and discounted cash flow management. It is better to use these financial tools before investing money in particular investment options. If investors could these options in effective manner then it will increase the value of the investors in determined approach.  In this report, three alternatives project options have been taken into consideration.

This report reflects how well board of directors of company could make effective business decisions to make investment. The main objective of this report is to analyse the investment options available for the investors by using proper investment tools in determined approach (Vogel, 2014).

There are several strategies such as using of effective investment tools such as strategic net present value, discounted cash flow and use of proper investment methods and means. In this report, there are three particular capital investment options which could be used to make effective use of resources in business (Bodie, 2013).

In this part, critical analysis has been made to evaluate which investment option would be good for the investors for investment decision (Grant, 2016).

These are the above give investment options are the best suitable course of action which could be used by board of directors of company to create value on company’s investment amount. Investment decision of board of directors would be based on the net present value, discounted cash flow, and profitability index. These investment tools will analyze all the cash inflow and outflow of business throughout the time.

This has shown that these three projects options are the best possible options which could be undertake by company on the basis of net profit drive by company (Fontana and Schleicher, 2016).

It is the amount of cost which is required to pay to the investors for creating value on the investment. Company has 20% cost of capital after evaluating all the data and ASX index throughout the time (Bekaert and Hodrick, 2017).

Project investment option-1

Net present value- It is the different between present value of cash inflow and present value of cash outflow. It has shown how well company has increased its value on investment. Company has managed its net present value of $ 202150 (Brigham, and Ehrhardt, 2013).

Analysis of Three Investment Options

IRR- It is amount of required return which company needs to earn from its investment options. Therefore, IRR of company is 18% which is less than cost of capital. This option should be not accepted as per the IRR calculation (Brigham, 2014).

Net present value- It has given higher net present value of $ 21305 to the organization. As compared to project option -1, company should adopt this investment option.

IRR- This IRR is 22% which is more than its cost of capital. Therefore, company should accept this investment option (Petty, et al., 2015).

Project investment option-3

Net present value- In this case, company has negative present value which reflects that company will destruct the value of the investment if it indulged in this project investment option.

IRR= Company has higher IRR which reflects that company should accept this investment options and increase its overall return throughout the time (McKinney, 2015).

Justification of discount rate used

It is evaluated that while investing money in particular options and considering cost and benefits associated with it, it is considered that project option 1 is more important and provides more value to the board of directors. The discount rate of this project is based on the computed cost of capital of the company. Computation of discounted cash flow could be seen by observing the excel file attached with this report (Arnold, 2013).

These three projects have different revenue and cost associated with it. However, project option A has more net present value which reflects that if company could increase the overall value then the net present value of company will also be increased throughout the time. In addition to this, it is considered that project option-1 has higher net present value. Therefore, company should opt the investment option 1 to create value on its capital. In addition to this, project investment-2 has also earning capacity and shows less level of income to the investors. On the other hand, project investment-3 has negative value. If company invests in this investment project then it will have to bear amount of loss or destruction of the value.  These three projects have been evaluated by using discounted cash flow method and using 20% discount rate to identify the present value of the inflow (Robinson and Burnett, 2016).

This project has shown various risk associate with it. Ideally risk could be measured in terms of systematic and unsystematic risk. Systematic risk could not be avoided and based on the external factors of business. This company is engaged in international business which provides higher calculation factors for the business. Company has adopted the investment project-1 which reflects positive net present value of AUD $ 202150 which is very high and create high amount of cash for the business. In addition to this, company may face various internal and external factors risk and it may result to destruction of the total net present value of AUD $ 202150. This risk would be such as foreign exchange risk, sluggish market condition, stock market behaviour and changes in government policies and measures. This level of changes will showcase possible flexible factors which should be undertaken by company before accepting investment project. However, unsystematic risk could be considered by taking BETA of company (Fickler, et al. 2016).  Company has beta of .64 which is very low. It reflects that company will change by .64% if there is change in the market factors by 1%. It has positive relation and other rivals of the business will also be affected by it at the same tangent. Therefore, company estimated this beta by undertaking the share price fluctuation. However, determination of discounted cash flow rate is based on these all the internal and external factors of business. If company determine the cost of capital by computing beta and other factors then these level of changes will put negative impact on the estimated net present value of the investors.  These all risks could be mitigated by following proper methods and evaluation methods in determined approach. Company has various risks but the main risk of company is related to sluggish market condition. If company wants to overcome this risk then it has to invest its money in other diversified market sector. In addition to this, employee’s turnover and downfall in business will also be highly impacted by the business functioning of the company (Petty, et al. 2015).

Evaluation of Discounted Cash Flow and Net Present Value

After evaluating all the factors and business condition of the company, it is evaluated that if company could manage these risk in efficient manner then it will not only increase the overall value of the investment but also increase the investment amount. In addition to this, beta of company has also shown that company has less variable factors if company invest in first project it will surely increase the value of the investment (Radebaugh, Gray and Black,  2006).  It is considered that these three projects have different viability and showcase the different outcomes throughout the time. If investment is made in second project option then company could create value on its investment but there will be fewer outcomes. On the other hand, investment option third will give the negative outcomes and destruct the value of the investment. In the end, investment option-1 is more profitable and provides higher return to the investors. Now in the end, it could be inferred that if company could invest its money in other business options or investment option-1 then it would surely increase the value of the investment. Board of directors should not only consider the Net present value, discounted cash flow but also they needs to identify the viability of the cash inflow and positive and negative factors of these investment options (Brealey, Myers and Marcus, 2015).

Conclusion

After considering all the internal and external factors of business, it is considered that board of directors of company should invest their capital in project option-1 to create value on their investment. However, IRR of that investment option is comparatively low which could be mitigated by company by decreasing its overall cost of capital. In addition to this, risk associated with the business also very low which reflects that company has higher profitability if it accepts the project option-1 in its investment options. Now in the end, it could be inferred that company should assess the cost and benefits associated with the project before investing money in this particular project.

References

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.

Bodie, Z., 2013. Investments. McGraw-Hill.

Brealey, R., Myers, S.C. and Marcus, A.J., 2015. FundamentalsofCorporate Finance (p. 69). McGraw-Hill, New York.

Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Brigham, E.F., 2014. Financial management theory and practice. Atlantic Publishers & Distri.

Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.

Fontana, A. and Scheicher, M., 2016. An analysis of euro area sovereign CDS and their relation with government bonds. Journal of Banking & Finance, 62, pp.126-140.

Grant, R.M., 2016. Contemporary Strategy Analysis Text Only. John Wiley & Sons.

McKinney, J.B., 2015. Effective financial management in public and nonprofit agencies. ABC-CLIO.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU

Radebaugh, L.H., Gray, S.J. and Black, E.L., 2006. International accounting and multinational enterprises. New York, NY: Wiley.

Robinson, C.J. and Burnett, J.R., 2016. Financial Management Practices: An Exploratory Study of Capital Budgeting Techniques in the Caribbean Region.

Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis. Cambridge University Press.

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