Financial management - Essay Example

Year 0 Year Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Operating Activities                   Revenue 0 950000 1500000 1500000 1500000 1500000150000015000001500000Direct Cost0522500825000825000825000825000825000825000825000Incremental cost08000080000800008000080000800008000080000Depreciation0200000200000200000200000200000   EBT0147500395000395000395000395000595000595000595000Tax (35%)051625138250138250138250138250208250208250208250Net Income095875256750256750256750256750386750386750386750Add: Depreciation0200000200000200000200000200000   Cash flow from operating activities0295875456750456750456750456750386750386750386750Investing activities         Initial investment-100000000000000Additional net investment-2000000000000200000Cash flow from investing activities-12000000000000200000Cash flow from O and I activities-1200000295875456750456750456750456750386750386750586750Note: Because we have no additional info about the WC we assume that it will not change over the projects life.

Then Working Capital Change for each year Yi is: Change in Working Capital = Previous Year WC - Current WC = 0 (i=1 to 7) and ChWC0 = -$100,000 at year 8 and this amount will be recovered during year 8.( (McLaney, 2009)NPV:The discounted value of all ‘Cash inflows’ is $2275689.26.NPV= Initial investment – discounted cash inflows which is:NPV= (1,200,000)+ 2275689.26NPV= $1,075,689.26(Shim & Siegel, 2008) Payback period: At the end of two years the initial investment recovered would be equal to:295,875+ 456,750= 752625Therefore, the payback period is 2 years and Payback period: 2 years and 353 days (Warren, Reeve, & Duchac, 2011)a)The project would be accepted on the basis of NPV and payback period.

This project answers to both the queries in positivity. The NPV of this project is $1,075,689.26 which is substantial relative to the project. Moreover, the project would be accepted on the basis of payback method because of its initial investment recovery within 3 years. The company has a policy of not accepting projects with a payback period of over 3 years and this project will recover its initial investment in less than 3 years. (Puxty, Dodds, & Wilson, 1988)b)Company’s analysis of the project is based on NPV and payback period.

Initial investment has large weight age in both of these analyses therefore; our analysis would change if addition investment in land building is required. Our NPV would decline and payback period will increase substantially. If the additional investment is more than $1,075,689.26 then the project would not be accepted on the basis of NPV. Moreover, its payback period would drastically increase leading to refusal of the project’s proposal.Works CitedMcLaney, E. (2009). Business finance: theory and practice.

Pearson Education Canada.Puxty, A. G., Dodds, J. C., & Wilson, R. M. (1988). Financial management: method and meaning. Taylor & Francis.Shim, J. K., & Siegel, J. G. (2008). Financial Management. Barrons Educational Series.Warren, C. S., Reeve, J. M., & Duchac, J. (2011). Managerial Accounting. Cengage Learning.