FINANCE ASSIGNMENT

Finance Assignment

Finance Assignment

Question 1

(i)

The part of the study is related to the Air Ltd which is considering new product for which forecasting has been done which shows negative signs for commencing with the new product, for that reason, the CEO proposed some adjustment for launching the new product. However, it is observed that even after the adjustments, it is difficult for Air Ltd to launch the new product as the forecasted profitability situation of Air Ltd does not seem satisfactory.

New Product

Discounted Factor

10 %

Year

0

1

2

3

4

Net Cash flow

(50,000)

(7,000)

(15,000)

(19,000)

(28,000)

Cumulative Cash flow

(50,000)

(57,000)

(72,000)

(91,000)

(119,000)

Discounted Cash flow

(50,000)

(6,364)

(12,397)

(14,275)

(19,124)

NPV

(81,652)

(ii)

Negative NPV of new product of Air Ltd that is -81652 shows that the decision of pursuing investment in new product would be highly unfavourable for the Air Ltd. Since the NPV value is below the zero threshold level, this shows that the project is not highly attractive for the company. Investment in launching the new product will lead to decreasing the net worth of the firm at the completion of the project. The net present value (NPV) is the most popular method when evaluating investment projects in the long term. The net present value to determine whether an investment complies with the basic objective financial: maximize investment. The net present value determines if the investment may increase or decrease the value of small and medium enterprises. This change in the estimated value may be positive, negative, or remain the same. If it is positive means that the value of the firm will have an increase equal to the amount of net present value. If it is negative than that the firm will reduce its wealth in the value yielding the NPV; if the result is zero net present value of the firm does not change the amount of its value. It is important to note that the value of net present value depends on the initial investment prior investments during the operation, the net cash flows, the discount rate and the number of periods throughout the project (Groppelli and Ehsan, 2006, 23-39).

In addition to this, a positive value of NPV is that the capital investment is efficient. The concept of net present value is widely used in investment analysis for the evaluation of investments. The formula for NPV is valid only for the simple case of the structure of cash flows, where all investments are in the beginning of the project. In more complex cases for analysis may be necessary to complicate the formula to take into account the distribution of investment over time. Most often, this investment leads to the beginning of the project is similar incomes. The net present value measure based on information accounting if the investment is expected to achieve the objectives of capital providers. A positive NPV indicates that the investment can be undertaken. However the NPV is a provisional assessment tool based on information remains difficult to predict (Groppelli and Ehsan, 2006, ...