Financial Management and Capital Investment Decisions

Question: Discuss about the Financial Management and Capital Investment Decisions. Answer: Introduction The overall assignment mainly evaluates viability of the new project proposed by Resort Line Cruisers Bhd. The study critically evaluates the investment appraisal techniques and determines adequate applications, which could be used in detecting viability of the new project. Furthermore, the adequate cash flows are derived and adequate techniques are used in determining the future prospects of the new project. Adequate forecasting of the cash flow is conducted to determine cash inflow and outflow of the project during the project tenure. Lastly, adequate risk evaluation and recommendation are conducted, which might help the company in increasing the overall profitability from the new project. Critical evaluation of the techniques used and recommending adequate application to be used: There are relevant types of investment appraisal techniques, which could be used by the company for detecting viability of the new project. In addition, investment appraisal technique such as net present value, accounting rate of return, internal rate of return, modified internal rate of return, profitability index, equivalent annuity, payback period, and real option analysis is mainly used in detecting viability of the project. Moreover, these investment appraisal techniques mainly allow companies to detect overall viability of the project and depict the revenue, which will be added to the firm value. In addition, net present value is majorly helpful for discounting the time value of cash flows conducted by the company in future. This discounting allows investors to determine viability of the investment capital, which might help in adding value to the firm. On the other hand, Aggarwal and Thakur (2013) criticises that investment appraisal techniques mainly loses its friction if infl ation rate is not adequately calculated. Moreover, net present value, internal rate of return, and payback period is mainly identified as the most feasible investment appraisal techniques, which might help in identifying viability of the new project. However, other investment appraisal technique mainly focuses on single period method and does not accommodate time value of money. Thus, focusing more on relevant investment appraisal techniques could effectively help in pin pointing the exact benefits, which might be provided by the new project. Almarri and Blackwell (2014) criticises that some investment appraisal techniques mainly relies on cash inflows and does not comprehend the external factors, which might affect benefits from the project. Forecasting relevant cash flows and application of the techniques: Year Total cash flow Cumulative cash flow Discounting value Discounted cash flow 0 (10,300,000.00) (10,300,000.00) 1 1 1,510,000.00 (8,790,000.00) 0.892857143 1,348,214.29 2 1,585,600.00 (7,204,400.00) 0.797193878 1,264,030.61 3 1,665,736.00 (5,538,664.00) 0.711780248 1,185,637.98 4 1,750,680.16 (3,787,983.84) 0.635518078 1,112,588.89 5 1,840,720.97 (1,947,262.87) 0.567426856 1,044,474.51 6 1,936,164.23 (11,098.64) 0.506631121 980,921.05 7 2,037,334.08 2,026,235.44 0.452349215 921,586.47 8 2,144,574.13 4,170,809.57 0.403883228 866,157.52 9 2,258,248.57 6,429,058.14 0.360610025 814,347.07 10 2,878,743.49 9,307,801.63 0.321973237 926,878.36 Total Present value RM 10,464,836.76 NPV RM 164,836.76 IRR 12% Payback period 6.01 years From the overall evaluation of the above table adequate investment appraisal techniques could be identified, which depicts viability of the new project. In addition, NPV of the project is relatively positive and is around RM 164,836.76, which states that adequate profits are generated. The high NPV is mainly derived from deducting discounted cash flow from initial investment, which states the adequate profits generated by the project. Moreover, IRR of the company is mainly at 12%, which depicts the intrinsic rate of return that is expected from the project. The proposed investment will mainly generate around 12% return each year for the company, which is effective to improve their overall profitability. The payback period of the project is mainly at 6.01 years, as the initial investment is been collected by the company. In addition, derivation of payback period is mainly essential for the company to determine the exact time by which the overall initial investment could be recovered. The company mainly idealises lower payback period, as it help in accumulating the investment capital for future projects. In this context, Dyson and Berry (2014) mentioned that companies with the help of investment appraisal techniques are mainly able to detect the overall viability of the project, which could detect the most profitable project. On the other hand, Eliasson and Borjesson (2014) criticises that investment appraisal techniques mainly loses its friction if the inflation rate is not adequately inputted in the valuation. Risk evaluation: The overall risk evaluation mainly conducted to understand the change, which might reduce the actual benefits from the project. In addition, risk evaluation could be identified from the following attributes, which might affect performance of the company. Change in revenue generation capacity: The overall revenue of the new project is mainly identified after an effective consultation with outside party, which might change during actual performance. The change from consumer demand and price range might hamper the overall profitability, which might be generated from operations. The hindrance in revenue could mainly reduce the overall cash outflow, which in turn might reduce net present value of the project. Increment in overall marketing and promotional activities could effectively help the company in making adequate awareness for the services provided in Cruiser (Gotze, Northcott and Schuster 2015). Increment in cash outflows: The overall investment in the cash outflow conducted by the company to maintain operations in the new cruiser could mainly increase the overall risk of the project. The cash outflow is mainly assumed and any increase could mainly hamper the overall profitability, which is depicted from the investment appraisal techniques. Moreover, adequate costing measures such as activity-based costing and zero based costing could be adopted by the company to reduce the overall cash outflow in future (Guerra, Magni and Stefanini 2014). Conclusion and recommendations: After evaluating and implementing the relevant investment appraisal techniques, the viability of the new project could be identified. In addition, the NPV is positive RM 164,836.76, payback period is 6.01 years, and IRR is 12%. These positive valuations mainly state that new project is viable and could help in increasing value of the firm. Furthermore, the risk evaluation could also help in reducing the problems, which could arise in near future. Moreover, increment in valuation of the new project mainly helps in improving the overall profitability of Resort Line Cruisers Bhd. References Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting. InEntrepreneurial Finance for MSMEs(pp. 293-320). Springer International Publishing. 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