NPV can be defined as a capital-budgeting decision criterion defined as the present value of the free cash flows after tax less the project’s initial expenditure. This gives an indication of the net value, by terms of today’s dollar value, of an investment proposal. This is an additional method to help businesses make the decision to accept or reject a project. If the projects net value is greater than or equal to zero, the project is accepted. When it is less than zero, this determines rejection of that project.
Which method would lead to the best decision when a competitor is submitting a lower bid for your product? The absorption cost method will show the profitability and will provide the best references concerning how much money the company will make as compared to the bidder who has the lowest bid. Absorption costing will be more useful to companies that do not sell all of its products manufactured during a certain period. By using absorption costing the cost of the product, is not going to be shown until the time that
This is when the objective of the firm is achieving as high a total revenue as possible and occurs when marginal revenue is equal to zero, as shown on the graph. Another objective of a firm may be profit satisficing, where a firm makes a reasonable level of profit that satisfies its stakeholders without maximising profit. Examples of this in the leisure market may include businesses that have only just set up, as they perhaps do not have the work force to maximise profits yet and instead settle for a satisfying level of profit. The final objective of a business may be utility maximisation. Utility maximisation is the aim of trying to achieve as much satisfaction as possible.
If the IRR is less than the WACC, the project should be rejected, as it impoverishes the firm’s owners. If the IRR equals the WACC, it earns only normal profits (i.e., the owners’ opportunity costs) and accepting it is a matter of indifference. In this care the project’s IRR is 18.031 > 11.88%, therefore the IRR rule tells us the same as the NPV rule: this project will enrich the firm’s owners. We note in passing that in more advanced courses in finance you would learn about projects for which this rule cannot be used. Broadly speaking, they are projects whose cash flows changes sign more than once—e.g., from negative to positive to negative again.
Net cash provided by operating activities indicates the net sources and uses of cash in operating activities. The statement of cash flows helps determine the inflows and outflows of cash which, in turn, helps an entity determine how effectively it is converting its revenues to free cash flow. Free cash flow is one of the best metrics to determine the profitability of a company. Free cash flow is determined by analysing the operating, investing and financing section of the statement of cash flows. Generally, free cash flow is cash flows provided by operating activities less cash flows used by investing activities for the purchases of plant, property and equipment and the repayment of long-term debt.
Looking at the data net sales increased over the five period from $2,097,000.00 to $5,218,007.04 increase $3,121.007. Totaling gross profit went from 816,000.00 to $2,030,469.12 increase of $1,214,469.10. In the above pro forma balance sheet, it has been established that one has assumed that current gross profit has increased in the ratio of gross profits. A reduction in any of the following selling expenses or administration expense will allow the company to retain more of its earnings and profit margin, and therefore will increase its need for external funding. The dividend disbursement rate is 25 percent of earnings, and the balance in retained earnings at the end of 2012 was $1,436,833.09.
In the event that the sales increase, the organization will create additional working capital, and can undoubtedly accomplish its yearly objectives. As stated by the organization's profit and loss statement, the organization must control its overhead costs and lessen its selling expenditures. After forecasting the five years sales there is an increase in sales from 15%, 10%, 25% and 50%. The gross profit will also increase every year from $697,428 to
6 – Opinion It is my opinion that using the customer’s credit balance is a good way to predict their annual income. Based off the data from the model we can see that as the credit balance increases so does the income level of the customer. The higher the income level the more the customer is willing to buy items on credit because they have the financial means to pay the minimum monthly premiums. 7 - 95% confidence interval for beta-1 0.011926-2.010(0.001289) = 0.00934 0.011926+2.010(0.001289) = 0.01452 95% CI = (0.00934, 0.01452) 8/9 – CI and PI for $4,000 credit balance Predicted Values for New Observations New Obs Fit SE Fit 95% CI 95% PI 1 44.19 1.21 (41.77, 46.61) (27.11, 61.27) Values of Predictors for New Observations
In the given scenario; if Company A determined that marginal revenue (MR) is greater than marginal cost (MC) the action that they should take to reach profit maximization is to continue manufacturing additional units of widgets until the marginal revenue is equal to marginal cost. Using the information provided in the data table, when firm has reached the output quantity of seven widgets their marginal revenue is still larger than their marginal cost by twenty dollars. As a result of increasing the quantity of widgets produced to eight the marginal revenue and marginal cost are now equal to zero therefore maximizing Company A’s
Caledonia Products Integrative Problem Fin/370 Caledonia Products Integrative Problem 1. Why should Caledonia focus on project free cash flows as opposed to the accounting profits earned by the projectwhen analyzing whether to undertake the project? Caledonia should focus on free cash flow rather than accounting profits because the free cash flow is what the organization receives, which can then be reinvested. Through thoroughly analyzing the free cash flow, Caledonia would be able to determine the actual benefit or the cost involved. The organization should primarily focus on the incremental cash flow because the incremental cash flow holds a marginal benefit from the project.