Week Three Discussion Questions Business Finance 370

Business Finance 370

Week Three Discussion Questions

How do you define working capital? What may happen if an organization neglected to manage its working capital? What techniques do you recommend for your organization? Why?

Working capital is an equation that represents a business's operating liquidity. Net working capital is calculated by taking current assets minus current liabilities. If current assets are less than current liabilities the company then has a working capital deficiency (defecit). This means a company would find itself with greater current liabilities than it is able to repay. Two working capital techniques that could be recommended are the hedging principle and TVM. The hedging principle follows that short-term liability requiring financing should come due at the same time the assets purchased with that financing produce cash flow for the organization. The TVM follows that when there is excess capital the organization should invest those funds to strengthen their position for times when financing may be needed. The investments should be in securities that can be made available as needed. The use of these techniques can help the organization grow funds and eliminate unnecessary short-term liabilities. The use of these methods require the organization to be pro-active in their monitoring practices.

What is capital planning? Why is the internal rate of return important to an organization? Why is net present value important to a project? How do you select from multiple projects presented to your organization?

Capital planning is the planning process used to determine whether a firm's long-term investments are worth pursuit. Long-term investments can include new or replacement machinery, new plants, new products and research development. The internal rate of return is important because it helps companies figure out what their rate of return is on individual projects-the earnings from the project.

Net present value is...