Basically for this assignment you need to have knowledge of the following topics:
•Capital budgeting techniques
•Use of discounting tables
•Types of risk – Business risk, break even and financial risk
•Sources of finance
•Portfolio standard deviation
The actual assignment questions has been attached as a file to this document. PLEASE READ IT CAREFULLY.
The report needs to me sent to myself by the end of thursday evening British time of 18:00 on the 20/10/05!!
Task 1 Part A
· Mr. Smith is required to invest £ 1,500,000 payable at once and the remainder £500,000 after one year, in addition he is required to invest £ 600,000 in working capital.
· For every unit sold Mr. Smith get a total of 12-6 = £6. So, for a sales of 125,000 units Mr. Smith would get a total of £750,000. every year. From this if he deducted the fixed cost of £950,000 he would make a loss of £200,000 every year if we ignored the effect of inflation. True, after four years the assets would no longer be depreciated but the problem considers a time frame of only four years. So, every year Mr. Smith would make a loss and so the project is not viable.
· Characteristics of a good proposal: Apart from the return on investment, a good proposal would have certain characteristics like it expands business, improves quality of production, reduces cost of production by improvement of efficiency, leads to diversification of products to meet competitive conditions, gives more satisfaction to customer by giving good free after sales service, provides more welfare facilities and includes research and development.
· Key variables important when estimating the cash flows for the discounting purpose: These include, average annual profits, average investment in the project, average investment, payback profitability, cost of investment, magnitude or timing of the cash flows, initial outlay and the required rate of return.
· How uncertainty and risk related to such variables is handled: An estimation of the capital expenditure is made to see that it is within the available financial resources of the company, ensure that no capital expenditure is made without the proper sanction of the Capital Expenditure Committee, prioritize the different projects, make periodical comparisons of the authenticated and actual expenditure, ensuring that capital budget is to be prepared for the capital expenditure and to ensure that the company spends money on fixed assets so that the concern keeps pace with the rapid technological advancements.
· Reasons for interdependency between the projects and its ...