Financial Management : Koolson plc - Essay Example

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During the current financial year, Koolson plc has decided to introduce a new plant for the purpose of introducing a new product in the market. For the purpose of appraising the investment, NPV and payback period technique was used. Following is the investment appraisal calculation (a) Years Particulars 0 1 2 3 4 Sales (in units)   50,000 60,000 55,000 40,000 Sales Revenue - 2,500,000 3,300,000 3,327,500 1,600,000 Direct Material - (500,000) (600,000) (550,000) (400,000) Direct Labor - (600,000) (720,000) (660,000) (480,000) Marketing expense - (100,000) (100,000) (200,000) (200,000) Working Capital (200,000) - - - - Machine (3,500,000) - - - - Sale proceed on scrap - - - - 250,000 Net Cash …
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Download file to see previous pages e investment appraisal analysis, all of the investment appraisal technique presents the fact that the capital expenditure decision can be fruitful for the company. If we consider the first investment appraisal technique of NPV (i.e. Net Present Value) it is obvious that the NPV of the investment decision is positive. Initially the total investment outlay is € 3.7 million which appears to be a substantial amount of investment, but gradually the investment can be seen to earn return. In the first two years the net cash inflow appears to be quite less but in the third and fourth of the operation, the net cash inflow is quite higher. In the end the NPV is calculated to be of € 813,626. It means that an investment outlay of € 3.7 million today will not only return the principal but will also bring additional cash inflow of € 813,626. This shows that the investment is lucrative. The other financial appraisal technique used for the evaluation of the capital expenditure decision is the payback period. As apparent from the calculation, the payback period is calculated to be 3 years. This shows that at the end of 3 years, the investment will start generating positive cash flows and will return the original investment in the company. 3 years is less than the total useful life of the project which is 4 years. Thus this shows that the investment is lucrative and the company should go ahead and undertake the investment. If the payback period was 4 or greater than 4 years than the company should refrain from undertaking the investment and consider other options. Several factors need to be considered when it comes to the investment appraisal decisions. The board of directors of the company needs to consider a considerable number of factors when it comes to the taking capital expenditure decisions in the company. One of the imperative factor which needs to be consider by the company while evaluating an investment is the inflation in the future cash flows. The inflation in the future expected revenue and cost (i.e. the cash inflow and outflow) can significantly impact the NPV and IRR of the project. In addition, one of the most important decision making factor is the source of funding for the capital expenditure and how it will be arranged. The board of directors of the company needs to decide whether the funding should be equity based or debt based. Both modes of financing i.e. equity and debt have their own advantages and disadvantages. There are several factors which need to be considered before taking such decisions. For example statutory rules and requirements, terms and conditions imposed by the counter party and general economic ...Download file to see next pagesRead More
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