The Fundamentals of Corporate Finance - Assignment Example

Consider the following scenario, if ABC Company bought an asset three years ago for $10,000 with an estimated life of four years. The current market price of the asset is disposed of is $4000, however, its book of accounts shows $2500. If the market price is not incorporated in the analysis, it would eventually lead to a bogus decision.

Therefore, it is essential for a financial manager to make the current market price, an integral part of the analysis. 2. The Valuation Principle is a tool to assess the value today of cost and benefit associated with a decision. Moreover, this method will estimate the value of an asset based on the cash flow stream in the future. Cash flows are discounted to their present value through a concept of the time value of money. The opportunity cost of the capital invested would be taken as the discount rate. Opportunity cost is based on the relation of risk and reward associated with an investment therefore, the incentive of higher return should be provided to accept the risk associated with it (Berk, Demarzo, & Harford, 2009).

It could be of immense help for a financial manager while taking up a decision whether the company should undertake a new venture or not. If a business decides to make a venture whose net cash flow will result in an undesirable NPV then the Valuation principle would help them choose a better alternative whose return is more than starting off a new venture.3. Cost-benefit analysis is an approach to assess whether the proposed project, policy, or program is worth doing or not. It takes into account the cost associated with the project with the benefit to be produced.

It also involves a comparison of alternatives and assesses which option should the company choose. The cost-benefit analysis takes into account all relevant costs and a benefit associated with the project in the future and discounts it back to present value. If the net present value (NPV) is undesirable then the project would not be undertaken and other alternatives would be considered. In a nutshell, NPV provides the cost and benefit pertinent to an investment today so that future decisions could be taken on the basis of it.