Financial Management Essay

1048 WordsJul 2, 20115 Pages
Financial Management Submission date: By 12 Noon 24th July 2010 Written by: IAF Question 1 Ratios Liquidity [pic] Profitability [pic] Efficiency [pic] Investment [pic] Question 2 Terracotta had two key areas when making the decision to invest, the main one being the application of funds. In effect the decision is critical from Terracotta’s standpoint as a company is willing to invest in a new project as long as it increases the shareholder's wealth and generates a reasonable return over the cost of procuring the capital. Although it’s impossible to predict the future cash flow to be generated if the project is undertaken some sort of analysis and prediction should be involved. Based on certain assumptions and probabilities future cash flows are calculated for the tenure of the project involved. Looking at Terracotta’s situation, they cannot simply add up all the predicted future cash inflows and subtract the sum from the initial investment to come to a decision as to either project's viability due to the deteriation of real monetary value as time passes giving an assumption that money has got time value and an investor would prefer cash today as compared to cash a year later because of a two fold reason: Inflation drops the purchasing power of any currency a year down the line and interest can be earned if the currency is invested. Given this, all the future cash flows occurring at different points in time need to be discounted back to year zero and aggregated in order to evaluate the viability of the proposed project. This can be conducted using the Weighted Average Cost of Capital or WACC. The spread sheet below shows the payback period for each project. Based on this outcome and the theories in further questions, I feel the preferred project will be Project X. [pic] The net present value or net present worth is

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