Managing Financial Resources and Decisions
Question 1:
Introduction
At the epicenter of every business organization, is a splendid book keeping records. In other works, companies should strive to update their financial accounts in order to determine the firm’s profitability and viability in the long run. On the other hand, it is prudent to plough back excess cash (retained earnings) from business operations to finance long term investments. Further, these investments need to be evaluated using the most appropriate capital budgeting appraisal techniques such as net present value, payback period, profitability index and internal rate of return Abor, Joshua and Yindenaba 320). This paper therefore attempts to compute, interpret and analyze financial records for decision making.
The net cash flow from assets include;
Net flow from current assets = ($715)
Net flow from assets = ($1430)
Thus, the total net cash out flow from assets were $2145. This figure is realistic as it signifies that the company used cash to invest in both current and fixed assets.
Question 2:
In view of the above, the excess financing required is $8,367.40.
Question 3:
Basic salary = $55,000
Bonus (for joining the company) = $10,000
Total accrued salary growth = $55,000 + (1+0.035) ^25
= $129,978.47
Bonus salary = $55,000 + ($55,000 * 10%) = $60,500
Net present value (PV) = $190,478.47/1.09^25 = $22,090.42
Question 4:
In view the computations above, project A will be chosen in all those scenarios since it has a shorter payback period, and positive and a higher, IRR, PI and NPV as suggested by Dufresne et al (260). For instance, through computations, NPV for project A is $13,155.48 while that of project B is $6,711.10 respectively.
Question 5:
Cost of computer = $360,000
Depreciation on straight line = 5 years
Salvage value = $60,000
Carrying amount = $360,000-$60,000
= $300,000
Depreciation = $300,000/5 = $60,000
Net inflow associated with the machine = $105,000
Working capital $80,000
Total savings = $105,000 + $80,000 = $185,000
Tax = $185,000*34% = $62,900
= $185,000-$62,900
=$122,100
Total income plus depreciation = $122,100 + $300,000
= $422,000
NPV = 422,000/1.12^5 = $239,454
Since the NPV is positive, it will be worthwhile to purchase the computer.
Conclusion
In capital budgeting decisions, it is recommended to undertake a project with positive and higher NPV and PI. This means that the project is viable and likely to generate profits in future as in the case of project (A) above. Nonetheless, depreciating an asset is indispensable as it determines the carrying amount of an assets and allows for wear and tear over a given duration of time. However, it should be noted that depreciation is a non cash item which should be added back when computing an organizational operating cash flow.
Works Cited
Abor, Joshua Yindenaba. "Evaluating Capital Investment Decisions: Capital Budgeting." Entrepreneurial Finance for MSMEs. Springer International Publishing, 2017. 293-320.
Dufresne, Raymond, Frank Paul Salamone III, and Thomas Frederick Bart. "System And Method For Capital Budgeting." U.S. Patent Application No. 14/685,261.
Question 1:
Introduction
At the epicenter of every business organization, is a splendid book keeping records. In other works, companies should strive to update their financial accounts in order to determine the firm’s profitability and viability in the long run. On the other hand, it is prudent to plough back excess cash (retained earnings) from business operations to finance long term investments. Further, these investments need to be evaluated using the most appropriate capital budgeting appraisal techniques such as net present value, payback period, profitability index and internal rate of return Abor, Joshua and Yindenaba 320). This paper therefore attempts to compute, interpret and analyze financial records for decision making.
- Net Income is presented using an income statement as computed below;
| Cutie Industries | ||
| Income Statement | ||
| For the year ending 2013 | ||
| Sales | $ 19,900.00 | |
| Cost of goods sold | $ 14,200.00 | |
| Gross Profits | $ 5,700.00 | |
| Less: Operating Expenses | ||
| Depreciation | $ 2,700.00 | |
| Interest | $ 670.00 | |
| Dividends paid | $ 650.00 | |
| Total Expenses | $ 4,020.00 | |
| Net before tax | $ 1,680.00 | |
| Tax (40%) | $ 672.00 | |
| Net Income | $ 1,008.00 |
- Operating cash flow for 2013
| Cutie Industries | ||
| Cash Flow Statement | ||
| For the year ending 2013 | ||
| Cash flow from operating Activities | ||
| Net income | $ 1,008.00 | |
| Add back: Depreciation | $ 2,700.00 | |
| Tax | $ 672.00 | |
| Interest | $ 670.00 | $ 4,042.00 |
| Adjustment in WC | ||
| Increase in current assets | $ (715.00) | |
| Increase in current liabilities | $ 65.00 | $ (650.00) |
| Net cash flow from operating activities | $ 4,400.00 |
The net cash flow from assets include;
Net flow from current assets = ($715)
Net flow from assets = ($1430)
Thus, the total net cash out flow from assets were $2145. This figure is realistic as it signifies that the company used cash to invest in both current and fixed assets.
- If no new debt was issued during the year, the cash flow to creditors will be $65 while the cash flow attributed to stock holders will be $1008.
Question 2:
| Far East Tours Inc. | |||||||
| Pro Forma Income Statement | |||||||
| For the year Ending 2013 | |||||||
| 2012 | 2013 | ||||||
| Sales | $ 836,100.00 | $ 1,003,320.00 | |||||
| Costs | $ 650,700.00 | $ 780,840.00 | |||||
| Other Expenses | $ 17,100.00 | $ 20,520.00 | |||||
| Earnings before interest and tax | $ 168,300.00 | $ 201,960.00 | |||||
| Interest expense | $ 12,600.00 | $ 12,600.00 | |||||
| Taxable income | $ 155,700.00 | $ 189,360.00 | |||||
| Taxes | $ 54,495.00 | $ 54,495.00 | |||||
| Net Income | $ 101,205.00 | $ 134,865.00 | |||||
| Dividends | $ 30,300.00 | $ 30,300.00 | |||||
| Retained earnings | $ 70,905.00 | $ 104,565.00 | |||||
| Far East Tours Inc. | |||||||
| Pro Forma Balance sheet | |||||||
| For the year Ending 2013 | |||||||
| Current Assets | 2012 | 2013 | |||||
| Cash | $ 24,035.00 | $ 28,842.00 | |||||
| Cash Accounts receivable | $ 38,665.00 | $ 46,398.00 | |||||
| Inventories | $ 82,555.00 | $ 99,066.00 | |||||
| Total | $ 145,255.00 | $ 174,306.00 | |||||
| Fixed Assets | |||||||
| Net Plant and equipment | $ 392,350.00 | $ 470,820.00 | |||||
| Total Assets | $ 537,605.00 | $ 645,126.00 | |||||
| Current Liabilities | |||||||
| Accounts payable | $ 64,600.00 | $ 77,520.00 | |||||
| Notes payable | $ 16,150.00 | $ 16,150.00 | |||||
| Total | $ 80,750.00 | $ 93,670.00 | |||||
| Long term debt | $ 150,000.00 | $ 150,000.00 | |||||
| Owners’ Equity | |||||||
| Common equity | $ 130,000.00 | $ 130,000.00 | |||||
| Retained Earnings | $ 176,855.00 | $ 263,088.63 | |||||
| Total | $ 306,855.00 | $ 393,088.63 | |||||
| Total Liabilities and Equity | $ 537,605.00 | $ 636,758.63 | |||||
| External Debt Financing | $ (8,367.40) | ||||||
In view of the above, the excess financing required is $8,367.40.
Question 3:
- Net present value will be computed as follows:
Basic salary = $55,000
Bonus (for joining the company) = $10,000
Total accrued salary growth = $55,000 + (1+0.035) ^25
= $129,978.47
Bonus salary = $55,000 + ($55,000 * 10%) = $60,500
Net present value (PV) = $190,478.47/1.09^25 = $22,090.42
Question 4:
| Project A | ||
| Year | Cash flow | Accumulated cash flow |
| 0 | $ (550,000.00) | |
| 1 | $ 185,000.00 | $ 185,000.00 |
| 2 | $ 185,000.00 | $ 370,000.00 |
| 3 | $ 185,000.00 | $ 555,000.00 |
| 4 | $ 185,000.00 | $ 740,000.00 |
| 5 | $ 185,000.00 | $ 925,000.00 |
| Project B | ||
| Year | Cash flow | Accumulated cash flow |
| 0 | $ (350,000.00) | |
| 1 | $ 100,000.00 | $ 100,000.00 |
| 2 | $ 10,000.00 | $ 110,000.00 |
| 3 | $ 10,000.00 | $ 120,000.00 |
| 4 | $ 10,000.00 | $ 130,000.00 |
| 5 | $ 10,000.00 | $ 140,000.00 |
In view the computations above, project A will be chosen in all those scenarios since it has a shorter payback period, and positive and a higher, IRR, PI and NPV as suggested by Dufresne et al (260). For instance, through computations, NPV for project A is $13,155.48 while that of project B is $6,711.10 respectively.
Question 5:
Cost of computer = $360,000
Depreciation on straight line = 5 years
Salvage value = $60,000
Carrying amount = $360,000-$60,000
= $300,000
Depreciation = $300,000/5 = $60,000
Net inflow associated with the machine = $105,000
Working capital $80,000
Total savings = $105,000 + $80,000 = $185,000
Tax = $185,000*34% = $62,900
= $185,000-$62,900
=$122,100
Total income plus depreciation = $122,100 + $300,000
= $422,000
NPV = 422,000/1.12^5 = $239,454
Since the NPV is positive, it will be worthwhile to purchase the computer.
Conclusion
In capital budgeting decisions, it is recommended to undertake a project with positive and higher NPV and PI. This means that the project is viable and likely to generate profits in future as in the case of project (A) above. Nonetheless, depreciating an asset is indispensable as it determines the carrying amount of an assets and allows for wear and tear over a given duration of time. However, it should be noted that depreciation is a non cash item which should be added back when computing an organizational operating cash flow.
Works Cited
Abor, Joshua Yindenaba. "Evaluating Capital Investment Decisions: Capital Budgeting." Entrepreneurial Finance for MSMEs. Springer International Publishing, 2017. 293-320.
Dufresne, Raymond, Frank Paul Salamone III, and Thomas Frederick Bart. "System And Method For Capital Budgeting." U.S. Patent Application No. 14/685,261.
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