THE FINANCE ASSIGNMENT

The Finance Assignment



The Finance Assignment

Assignment 2

Using Cost Benefit Analysis methodology decides and justifies your decision whether St Edith should immediately proceed with the integrated stock management and creditor system.

The identification of costs and benefits of the project that are relevant to its assessment, it is necessary to define a baseline situation without a project or situation, the comparison of what happens with the project versus what would have happened without the project, define the costs and benefits very relevant.

Using Net Present Value

Time (£)

Amount of cash flows

8.5%discountfactor

Present value

Year 1

700

0.9215

645.05

Year 2

1,400

0.8495

1,189.3

Year 3

1,400

0.783

1,096.2

Year 4

1,400

0.722

1,010.8

Year 5

1,400

0.6655

931.7

Year 6

1,400

0.613

858.2

Year 7

1,400

0.565

791

Year 8

1,400

0.5215

730.1

7,252.35

NPV = Total present value - initial cost

NPV = 7,252.35 - 10,300

NPV = -3,047.65

It isn't possible to get 10,300 £ back at rate 8.5% in 8 years because NPV is considered negative and the project can be accepted.

There is an investment generates for hospital 10% per annum and now management decides in respect of investment in 5th year will cost 1,400 pounds and generate 700 annually for 3 years and then can sell for 110 thousand Will continue in an existing business, which generates 10% or invest in next year.

Amount of cash flows = 931.7 present value is the same amount of 100,000 pounds. Profit for the year 5000 and the initial present value of profit in the first year is 5000 \ 1.1 = 4545 pounds. Profit for the year 5000 and the second current value of the profit the second year is 5000 \ (1.1) ^ 2 = 5000 \ 4132 = 1.21 pounds. Profit for the year 5000 and the third the present value of profit for the third year is 5000 \ (1.1) ^ 3 = 3757 pounds. The value of the sale of land at the end of the third year 110,000 and the present value of the sale is an 110,000 \ (1.1) ^ 3 = 82 644 pounds. Net present value of the project = -100000 +4545 +4132 +3757 +82644 = -4922 pounds and the value is negative. As in this scenario that the cost may seem profitable that in reality is not economically feasible because the net present value of the project is negative. This means that the continuation of other project which generates 10% per year better than the proposed project. Only the project can be considered feasible from an economic standpoint if the net present value is positive. When there are two profitable compared to the net present value is the best way to determine the most feasible project (Atrill, 1997, 20).

Using internal rate of return (IRR)

Time ( £)

Amount of cash flows

8.5% discount factor

0.4% discount factor

Present value (8.5%)

Present value (0.4%)

Year 1

700

0.9215

0.9960

645.05

697.2

Year 2

1,400

0.8495

0.9920

1,189.3

1,388.8

Year 3

1,400

0.783

0.9881

1,096.2

1,383.34

Year 4

1,400

0.722

0.9841

1,010.8

1,377.74

Year 5

1,400

0.6655

0.9802

931.7

1,372.28

Year 6

1,400

0.613

0.9763

858.2

1,366.82

Year 7

1,400

0.565

0.9724

791

1,361.36

Year 8

1,400

0.5215

0.9685

730.1

1,355.9

7,252.35

10,303.44

NPV = Total present value - initial cost

NPV for 8.5 % discount factor = 7,252.35 - 10,300= -3,047.65

NPV for 0.4% discount factor = 10,303.44-10,300= 3.44 still positive

IRR = positive rate + {[positive NPV / (positive NPV + negative NPV)] ×range of rates}

IRR = 0.4% + {[3.44 / ...