Thursday, October 17, 2019
Financial Decision Making Essay Example | Topics and Well Written Essays - 3250 words
Financial Decision Making - Essay Example The company can also increase or improve on its sales so that however much the payments are, the receipts will still be more in order to for the company to meet its current liabilities. In case of surplus, the company can plough back the surplus into investment and in order to increase future sales hence better future receipts. Net Present Value is the difference between the present value of the cash inflows and the present value of the net outflows. Project cash flows are discounted using an appropriate rate which is the minimum rate of return required by the investor. In the case of these two projects; Alpha and Beta projects, the discounting rate is 10% which is used to calculate the discounting factors with the formula 1/(1 + r)n where r is the discounting rate and n is the number of years. The appropriate cash flows are the after tax cash flows, therefore the net cash flows should be estimated on the after tax basis. However, in these projects, there was no tax involved and no p roject had a residual value after the completion period of 5 years. Computation of cash flows requires a special treatment of non-cash expenses such as depreciation though in these projects, there is no depreciation considered. However, in case of depreciation, it has an indirect effect on the cash flow since it is a tax deduction expense. The general criteria for Net Present Value is that the project with a negative net present value should be undertaken since it increases the wealth of the shareholders and a project.