An explanation and evaluation as to how risk can be incorporated into the analysis using the data provided

$10.00

SKU: solviv15 Category:

Importance of risk and how risk can be incorporated into the decision making process

 

You are the financial manager of a public limited company called Spearhead, a company that manufactures medical products.

 

You have agreed to write a report for the managing director for the next board meeting, to propose a revised company policy for evaluating and making decisions on future capital projects such as the proposed €3.4 million investment in a new product.

 

The company has always evaluated investments using the Internal Rate of Return model as the selection criteria.

 

The company’s managing director thinks that NPV may be a better method and is aware that some companies use multiple methods. He is also concerned about how risk is incorporated into the analysis. He now requires your opinion on these matters.

 

Your report will need to explain the rationale for having a corporate policy on investment decisions, which must include a critical evaluation of how investment appraisal methods support corporate investment decision making and how risk can be incorporated into the decision making process.

Your report will also cover the funding of the investment and the criteria for selecting the most appropriate methods to finance the proposed project.

 

It should also discuss wider financial and non-financial aspects of the evaluation of capital investment and the implications of these for the decision making process.

 

Project

The appraisal is for a new product that will have an estimated life cycle of six years and which requires a new dedicated production line.

 

The entry into this new market will require an initial investment of €3.4 million and at the end of six years, the equipment will have an estimated scrap value of €600,000.

 

The company has recently spent €200,000 on research and development relating to the new product.

 

Assume that the capital structure consists of 80% equity and 20% debt capital.

 

 

You are provided with the following information concerning the project:

 

Initial capital expenditure on machinery                     €3,100,000

 

Estimated scrap value of machinery                             €600,000

 

Annual net cash inflows                                              €1,000,000

 

Initial working capital                                                      €300,000

 

The company depreciates capital equipment on a straight-line basis over the life of the machine after adjusting for any estimated scrap value.

 

The machine would be bought on the first day of the company’s accounting period and would attract a 25 percent writing down allowance.

 

The machine would be financed with a five-year loan from Bank of Ireland Finance at an interest rate of 7 percent.

 

The interest payments attract tax relief. Corporation tax is payable at 30 percent, one year after year-end. Assume that any excess tax allowances can be utilized in the business.

 

The company has calculated its cost of capital at 12% cost of capital and if that return is achieved, then they will be able to increase dividends to shareholders by €100,000 a year over each of the next six years.

 

Assume all cash flows occur at year-end.

 

REQUIREMENT

 Include in your report the following:

 

  • A critical evaluation of the role, relevance and application of a range of capital investment appraisal models, using the data provided.

 

  • An explanation and evaluation as to how risk can be incorporated into the analysis using the data provided.

 

  • A discussion of the funding of the investment and the criteria for selecting the most appropriate methods to finance the proposed project.

 

  • A clear recommendation, justified as to how decisions should be made within the company, incorporating the assessment of non-financial factors and risk.

 

  • Select and apply appropriate financial decision making techniques to conduct appraisals of investment decisions. Evaluate alternative corporate investment decisions.

 

Specific coverage of the following points is required

 

  • Rationale for having a corporate policy on investment decisions

 

  • A critical evaluation of how investment appraisal methods support corporate investment decision making

 

  • Importance of risk and how risk can be incorporated into the decision making process.

 

  • Discuss the funding of the investment and the criteria for selecting the most appropriate methods to finance the proposed project.Affect on capital structure of the company.

 

  • A discussion of the wider financial and non-financial aspects of the evaluation and the implications of these for the decision making process.

 

  • Evaluation and recommendation to the Board

Writing your homework and assignments all on your own is a difficult task. So, Assignments4u has made it easy for students by helping them in writing their assignments. Assignments4u will assist you in completing your tasks, and you can approach us with all your assignment, homework, and essay writing requirements.

We have over 4350+ experienced writers working as experts in different streams of study. Get all your academic doubts clarified and take pride in learning subjects like history, math’s or law. Our assignment help and essay help is available in countries like USA, Australia, New Zealand, Singapore and many more. Get programming assignment help, corporate finance assignment help, marketing assignment help or else business management assignment help in exchange for a nominal price.

Reviews

There are no reviews yet.

Be the first to review “An explanation and evaluation as to how risk can be incorporated into the analysis using the data provided”

Your email address will not be published. Required fields are marked *

Questions and Answers

You are not logged in

Sorry no more offers available

When assignments gets tough, get tougher

Want a fresh solution like this one? 
We are available 24/7
ORDER NOW
+1
Share
Tweet
Pin
Call Back