Financial Managment

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This is due to the fact that since they are incremental costs resulting from the project , they are relevant for the economic decision concerning such project1 Analysis of the project through the Net Present Value Technique 2007 ‘000 2008 ‘000 2009 ‘000 2010 ‘000 2011 ‘000 2012 ‘000 Cash Inflows Sales Revenue – 7 ,000 7 ,700 8 ,400 6 ,300 5 ,200 Disposal of plant machinery 375 Released working capital 1 ,400 Cash Outflows Capital Cost 3 ,375 Additional working capital 1 ,000 400 5 ,850 6 ,300 6 ,750 5 ,400 4 ,950 Net Cash Inflow (Outflow (4 ,375 750 1 ,400 1 ,650 900 2 ,025 Discount Factor 12 1

1 next year3 Analysis of the project through the Internal Rate of Return Method Year Net Cash Inflow (Outflow ‘000 Discount Factor at 14 Present Value at 14 ‘000 Discount Factor at 15 Present Value at 15 The capital project at hand reveals both a positive net present value and an internal rate of return higher than the present cost of capital In this respect , the project is financially feasible and will enhance the shareholders wealth

298 Notes Depreciation was not included with the cash outflows outlined in the above table , because they are a non-cash expense and thus does not reflect any cash outflows The investment in working capital ought to be included with the cash flows similar to the capital expenditure of the project when it is incurred

However , when such working capital is released , it ought to be considered as additional cash inflow for the project at hand2 The net cash inflows /outflows were discounted with a 12 discount factor in to adhere with the time value of money principle

Paper Topic: Financial Managment Question 1 Computation of Year Variable Costs per unit Units sold Variable Costs Incremental Fixed Overheads Costs 2008 45 100 ,000 4 ,500 ,000 1 ,350 ,000 5 ,850 ,000 2009 45 110 ,000 4 ,950 ,000 1 ,350 ,000 6 ,300 ,000 2010 45 120 ,000 5 ,400 ,000 1 ,350 ,000 6 ,750 ,000 2011 45 90 ,000 4 ,050 ,000 1 ,350 ,000 5 ,400 ,000 2012 45 80 ,000 3 ,600 ,000 1 ,350 ,000 4 ,950 ,000 Notes Costs The cash outflow stemming from the additional fixed overheads will be considered in the capital project at hand

56473 Present Value (4 ,375 ) 669 1 ,116 1 ,174 571 1 ,143 Net Present Value

At this stage it is also important worth mentioning that financial factors are not the only variables that management should consider in capital project decisions

For example , the effect of the capital project on the reputation of the organisation is an important facet to consider

For instance , will this range of product hold the quality that was portrayed in other products manufactured by Wandering

There are also qualitative characteristics that ought to be taken into account

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