Submitted by: Submitted by tuslau
Views: 339
Words: 1260
Pages: 6
Category: Business and Industry
Date Submitted: 10/06/2010 08:47 AM
CF Assignment
Q1)In order to find out the feasibility and worthiness of acquiring the new machine, we have to identify what are the cash flow items which are incremental that arise directly from undertaking this project, so that we can justify the decision that probably will meet the requirement of the managing director.
For this project, we have to find out the incremental in cash flow while we undertaking the project. Firstly….. When we buy the new machine, we can sold our old machine at 20,000 pounds and the new machine can create 18,000 pounds of annual cash benefits according to the production manager. Also, there will be incremental advertising cost at 40,000 pounds and a further 8,000 pounds a year which stated by marketing manager if we raise up this project. Although the marketing director said we have to settle the bill of 18,000 pounds in marketing cost, since this is sunk cost, so it is not relevant information under consideration. But he also said there will be an 25% reduction in sales that is around 15,000 pounds cash less in sales because of competing our own product. Although there is interest on loans to finance the project, we normally discount project cash flows with a cost of capital that is the rate of return required by the investors, and so we should discount the total amount f cash flow available to all investors. Since they are part of the costs of capital, if we subtracted them from cash flows, we would be double counting capital costs.
(………)
Q2) To assess the economic worth of this proposal, there are 3 different types of calculations can be used which are payback period, return on investment (ROI) and the discounted cash flow techniques.
With the reference of the table 2, the payback period occurs in Year 2, when the cash flow turns from negative (-191.3) to a positive (+4.33). As soon as the cumulative cash flows turn from a negative to positive, that’s the payback period.
Thus, Payback Period = 2 Years +...