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Business Analysis - Essay Example

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In this method, the Net Present Value of cash flows for each period is calculated. If this value comes out as positive, it makes business sense to go for the project or the plan.
In this method, all the…
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Download file to see previous pages The cash flow for a particular period reflects the flow of cash in future for that period. But due to a loss in the time value of money, the present value of the cash flow is actually less than the actual value. To have a realistic view of the cash flows the actual values need to be converted into what are called as the Present Values. The factor by which the actual value is multiplied to calculate the present value is called the Discount Factor. Discount factor lies between 0 and 1. It is determined by the rate of return on capital during a given period and can be calculated using compounding (Johnson, Derek).
Using the net present value approach, it can be found out that the net cash flows are positive in all quarters and the initial investment is also recovered within a quarter. The Net present value is hence positive and comes out as £5,030,687. The NPV (Net
Present value) calculations can be done using an excel spread sheet. An extract of the same is shown in Figure 2.1. Thus, it can be concluded from this that, the boutique must go with the development plan.
There are several key factors that can affect the cash flows. One of them is the Build-up factor. If the build-up factor becomes negative i.e. there is a decrease in income in the following quarters due to some reason, the NPV decreases. The NPV turns negative at -57% build-up factor for each quarter as shown in Figure 3.1. This is where the decision gets reversed. This could happen in case of adverse external circumstances.
The second factor which can affect cash flow is Cost of Sales. If due to an increase in raw material costs or due to some other factors, Cost of Sales rise as much as 89% of the sales, the NPV becomes negative and the decision has to be reversed. This is shown in Figure 3.2.
Thirdly, the increase in rent can have an impact on net cash flows especially in wake of continuously rising real estate prices. If the rent increases to £1427 per sq. m., ...Download file to see next pagesRead More
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