Finance and Financial Management of Organization - Assignment Example

Financial Management s Organizations always strive hard for the sake of economic prosperity and strategic momentum. Unfortunately, there is no single definition of the term “Organization” exist in this world, because every author has had defined the concept in somewhat different manner (Bruce, 2006). According to the major consensus of the authors, it is found that “organization is basically a place wherein people belong to different demographics and mindset work together for the achievement of a single and pre-specified goal. In a second place, authors had identified that; organization is a place where in different departments work together in order to contribute in the long run productivity of the company as a whole (Lauby, 2005). Among number of departments work in an organization, the name of finance department is one of them, which has its own recognition and importance from the standpoint of a company as it deals with the management of the funds of the company as a whole. Among different functions and operations, usually initiated by the finance department, the name of capital budgeting is one of them. The main theme of this paper is to analyze the capital budgeting stance of the company, mentioned in the case study as a whole. There are total four questions that require being answered accordingly in this particular report. Assumptions There are certain assumptions that need to be considering while complete this particular section. Initial Outlay = £750,000 + £40,000+ £200,000 + £ 50,000 + £ 30,000 + £ 1, 200,000 = £ 22, 70,000 Sales Unit Year 1 = 20,000 Year 2 = 30,000 Year 3 = 30,000 Year 4 = 30,000 Year 5 = 20,000 Selling Price = £ 170 per unit a) Determination of Investment Appraisal The essence of investment is extremely important from the viewpoint of an organization and there are number of methods from which an organization can analyze the stance of investment as well as appraisal in a perfect and efficient manner. Under the nose of Investment Appraisal, the name of methods like NPV, IRR, Payback and PI comes heavily and each and every method has its recognition and importance as far as analyzing the competitiveness is concerned. Mentioned below table is showing the cash flow which would have been generated by Bodmin Plc by considering the above cost benefit analysis.   Year 1 Year 2 Year 3 Year 4 Year 5 Total Units 20,000 30,000 30,000 30,000 20,000 Sales Units @ 170 Per unit 3,400,000 5,100,000 5,100,000 5,100,000 3,400,000 Cost of Operations @ 120 Per Unit 2,400,000 3,600,000 3,600,000 3,600,000 2,400,000             Gross Profit 1,000,000 1,500,000 1,500,000 1,500,000 1,000,000 Fixed Cost 150,000 150,000 150,000 150,000 150,000 Profit after Fixed Cost 850,000 1,350,000 1,350,000 1,350,000 850,000 Less: Depreciation 300,000 300,000 300,000 300,000 300,000 Profit Before Tax 550,000 1,050,000 1,050,000 1,050,000 550,000 Tax @ 30% 165,000 315,000 315,000 315,000 165,000             Profit After Tax 385,000 735,000 735,000 735,000 385,000             Cash Flow: Add Back Depreciation 300,000 300,000 300,000 300,000 300,000             Cash Inflow 685,000 1,035,000 1,035,000 1,035,000 685,000 Net Present Value Analysis Net Present Value (NPV) is one of the most important methods, used for the purpose of Capital Budgeting (Lawrence J. Gitman, 2008). Net Present Value analyzes the future cash flow at the present time. The table of NPV is mentioned below, NPV ANALYSIS Initial Outlay 2,270,000 Year Undiscounted Cash Flow Discounted @ 14% 1 685,000 600,877 2 1,035,000 796,399 3 1,035,000 698,596 4 1,035,000 612,803 5 685,000 355,768       Total value £   3,064,442 Less: Initial Outlay £   2,270,000 NPV £   794,442 From the above mentioned table, it is found that the NPV of the company against the discounted factor of 14% is £ 794,442, which is showing that the project could be selected accordingly. Internal Rate of Return Analysis Internal Rate of Return (IRR) is yet another important methods that use in the process of capital budgeting. IRR is a point where in the future cash flow of a project or a company becomes zero (Bryman A, Bell E, 2007). Apart from the NPV, this particular method also used heavily by the companies and the analysis is mentioned below, IRR ANALYSIS Year Undiscounted Cash Flow £ Discounted @ 14% Initial Outlay (2,270,000) (2,270,000) 1 685,000 600,877 2 1,035,000 796,399 3 1,035,000 698,596 4 1,035,000 612,803 5 685,000 355,768       IRR % 27 12 The IRR of the company in undiscounted cash flow 27%, while in discounted it is 12% which is lower than the actual percentage of 14%, hence it should not be accepted. Payback Period Analysis A method that analyzes the efficiency of a company in terms of paying back its loan is known as Payback Period Analysis (Crowther D, Lancaster 2008). The chart having both discounted and undiscounted payback analysis period, and the chart is showing the same, Payback ANALYSIS Year Undiscounted Cash Flow £ Discounted @ 14% Initial Outlay (2,270,000) (2,270,000) 1 685,000 600,877 2 1,035,000 796,399 3 1,035,000 698,596 4 1,035,000 612,803 5 685,000 355,768       Payback Years 2.53 3.28 From the analysis, it is found that the company becomes able to pay back the loan is 3.28 years. b) NPV: The analysis of NPV is showing that the project would be beneficial for the company as far as generating income is concerned, because the computed result lies in positive figures IRR: The computed IRR is 12% which is lower than that of the WACC of the company which is 14%, hence the project has not lie in the acceptance region Undiscounted Payback: The undiscounted payback period of the company is 2.53 Years Discounted Payback: The Discounted Payback Period of the company is 3.28 years, hence it could be selected c) If the rate of inflation which is 4%, would be taken into consideration of the analysis, then it would found that the discount rate would increase to 18% from 14%. The entire analysis pertains to NPV, IRR, Discounted and Undiscounted Payback Period would certainly change with this stance. The computed amount and the rationale of the investment is mentioned below, NPV % 18% = the computed NPV is £ 517,024 which is in positive, hence it should be selected IRR = It is below than the 14% of Discount Rate hence it could not be selected Undiscounted = Payback is 2.53 Discounted Payback is 3.59 Years Question-3) Right shares is like bonus shares, which the company issues to its investors in the year, when it not able to issue dividends. There are number of companies which issue right issues at the time of economic crisis. Among these companies, the name of GlaxoSmithKlien is one of them. GSK is one the largest pharmaceutical companies of the world. 1) The financial position of the company is wonderful. The current share price of the company is $ 2112.56, which is quite high as compared to any other company of the world. The company has been enjoying economic prosperity from number of years. The main reason behind issuing the right is quite straightforward as the company becomes less resilient in the year 2008 merely because of the current economic crisis. Due to the economic crisis, the company became less variant in giving dividend to its shareholders. 2) The company has around 10 million Shares and the right share issued at a rate of 5$ per share, hence the total amount of right share was 50 $. 3) At the time of issuing the right share, an investor should hold for the right time to sell. This is the only way from which the company can have the benefits. 4) The market reaction in this scenario is quite straightforward as all of the investors buy the shares of the company as a whole. Bibliography Bruce, A. (2006). How to Motivate Every Employe. New York : McGraw Hill . Lauby, S. J. (2005). Motivating Employees. Chicago: Adventure Works. Lawrence J. Gitman, C. D. (2008). The Future of Business: The Essentials. New York : John Wiley & Sons. Bryman A, Bell E, 2007, Business research methods, UK: Oxford University Press Cooper, 2006, business research methods, India: Tata McGraw Hill Crowther D, Lancaster G, 2008, Research methods, Hungry: Butterworth- Heinemann Read More