'Evaluation Of Investment Alternatives Essay\r'

' Introduction †ceiling budgeting\r\nA critical role of a monetary manager is the evaluation of detonating device checks. This is a corporeally important task because the money involved in such(prenominal) activities is signifi ignoret and the benefit or redness derived from leave highly influence the financial surgical operation of the whole organisation (Brockington R. B. 1996, p 102). Indeed, Nobel laureates Modigliani and Miller suggested in their theory of capital structure that the value of a follow is non affected by its paraphernalia, provided the primary factor that influences such value is the enthronization funds in wealth creating be afters (Pike R. et al. 1999. p 557 and 577).\r\n1.1 Evaluation of plans if their endangerment equals that of the household\r\n1.1.1 net profit founder place rule\r\n platform X\r\ninside information\r\n0\r\n€’000\r\n1\r\n€’000\r\n2\r\n€’000\r\n3\r\n€’000\r\n4\r \n€’000\r\n5\r\n€’000\r\n sign enthronisation\r\n(2,700)\r\n \r\n \r\n \r\n \r\n \r\n currency Flows\r\n \r\n470\r\n610\r\n950\r\n970\r\n1,500\r\n give the sack currency influx/(Outflow)\r\n(2,700)\r\n470\r\n610\r\n950\r\n970\r\n1,500\r\n12% disregard range\r\n1.0000\r\n0.89286\r\n0.79719\r\n0.71178\r\n0.63552\r\n0.56743\r\nPresent repute\r\n(2,700)\r\n419.64\r\n486.29\r\n676.19\r\n616.45\r\n851.15\r\n interlocking Present judge †€349,720\r\n throw Y\r\n expound\r\n0\r\n€’000\r\n1\r\n€’000\r\n2\r\n€’000\r\n3\r\n€’000\r\n4\r\n€’000\r\n5\r\n€’000\r\nInitial Investment\r\n(2, coke)\r\n \r\n \r\n \r\n \r\n \r\nCash Flows\r\n \r\n380\r\n700\r\n800\r\n600\r\n1,200\r\n arouse Cash Inflow/(Outflow)\r\n(2,100)\r\n380\r\n700\r\n800\r\n600\r\n1,200\r\n12% Discount ramble\r\n1.0000\r\n0.89286\r\n0.79719\r\n0.71178\r\n0.63552\r\n0.56743\r\nPresent rank\r\n(2,100)\r\n339.29\ r\n558.03\r\n569.42\r\n381.31\r\n680.92\r\nNet Present set †€428,970\r\nSource: Drury C. 1996, p 389.\r\n1.1.2 Internal position of Return Method\r\nPLAN X\r\n form\r\nNet Cash Inflow/(Outflow)\r\nDiscount operator*\r\nPresent survey\r\n \r\n€\r\n16%\r\n17%\r\n16%\r\n17%\r\n0\r\n(2,700,000)\r\n1.0000\r\n1.0000\r\n(2,700,000)\r\n(2,700,000)\r\n1\r\n470,000\r\n0.86207\r\n0.85470\r\n405,172.90\r\n401,709.00\r\n2\r\n610,000\r\n0.74316\r\n0.73051\r\n453,327.60\r\n445,611.10\r\n3\r\n950,000\r\n0.64066\r\n0.62437\r\n608,627.00\r\n593,151.50\r\n4\r\n970,000\r\n0.55229\r\n0.53365\r\n535,721.30\r\n517,640.50\r\n5\r\n1,500,000\r\n0.47611\r\n0.45611\r\n714,165.00\r\n684,165.00\r\nNet Present Value\r\n17,014\r\n(57,723)\r\nPLAN Y\r\nYear\r\nNet Cash Inflow/(Outflow)\r\nDiscount Factor*\r\nPresent Value\r\n \r\n€\r\n18%\r\n19%\r\n18%\r\n19%\r\n0\r\n(2,100,000)\r\n1.0000\r\n1.0000\r\n(2,100,000)\r\n(2,100,000)\r\n1\r\n380,000\r\n0.84746\r\n0.84034\r\n322,034.80\r\n319,3 29.20\r\n2\r\n700,000\r\n0.71818\r\n0.70616\r\n502,726.00\r\n494,312.00\r\n3\r\n800,000\r\n0.60863\r\n0.59342\r\n486,904.00\r\n474,736.00\r\n4\r\n600,000\r\n0.51579\r\n0.49867\r\n309,474.00\r\n299,202.00\r\n5\r\n1,200,000\r\n0.43711\r\n0.41905\r\n524,532.00\r\n502,860.00\r\nNet Present Value\r\n45,670.80\r\n(9,560.80)\r\nSource: Horngren T. C. et al. 1997, p 785 †787.\r\n1.1.3 Evaluation of proposals\r\n invention Y is more financially feasible under both methods. The net feed value of intend Y is €79,250 [€428,970 †€349,720] high(prenominal)(prenominal) than intention X. The internal pass judgment of return of Plan Y is overly 2.61% higher than the sepa rank plan, indicating a higher margin of safety on losses in upshot the expected interchange flows ar non achieved (Randall H. 1996, p 446).\r\n1.2 Examination of plans at dissimilar run a risk profiles\r\n1.2.1 Net Present Value Method\r\nPLAN X\r\nDetails\r\n0\r\n€’000\r\n1 \r\n€’000\r\n2\r\n€’000\r\n3\r\n€’000\r\n4\r\n€’000\r\n5\r\n€’000\r\nInitial Investment\r\n(2,700)\r\n \r\n \r\n \r\n \r\n \r\nCash Flows\r\n \r\n470\r\n610\r\n950\r\n970\r\n1,500\r\nNet Cash Inflow/(Outflow)\r\n(2,700)\r\n470\r\n610\r\n950\r\n970\r\n1,500\r\n13% Discount judge\r\n1.0000\r\n0.88496\r\n0.78315\r\n0.69305\r\n0.61332\r\n0.54276\r\nPresent Value\r\n(2,700)\r\n415.931\r\n477.722\r\n658.398\r\n594.920\r\n814.140\r\nNet Present Value †€261,111\r\nPLAN Y\r\nDetails\r\n0\r\n€’000\r\n1\r\n€’000\r\n2\r\n€’000\r\n3\r\n€’000\r\n4\r\n€’000\r\n5\r\n€’000\r\nInitial Investment\r\n(2,100)\r\n \r\n \r\n \r\n \r\n \r\nCash Flows\r\n \r\n380\r\n700\r\n800\r\n600\r\n1,200\r\nNet Cash Inflow/(Outflow)\r\n(2,100)\r\n380\r\n700\r\n800\r\n600\r\n1,200\r\n15% Discount Rate\r\n1.0000\r\n0.86957\r\n0.75614\r\n0.65752\r\n0.57175\r\n0.49718\r\ nPresent Value\r\n(2,100)\r\n330.437\r\n529.298\r\n526.016\r\n343.050\r\n596.616\r\nNet Present Value †€225,417\r\nSource: Hirschey M. et al. 1995, p 799.\r\n1.2.2 simile of decisions at different risk rates\r\nWhen the discount rate of the hold is considered instead of the overall rate of the company, the financial viability of Plan Y diminishes because this plan is a riskier project than the other(a) one and hence, a higher discount rate is chosen. The process of discounting arises from the time-value of money principle, and the higher the discount rate the lower the reconcile value from the cash flows generated from the project (Pike R. et al. 1999, p 66 & angstrom; 67). In such a stance, Plan Y is no longstanding the most optimal project because Plan X net present value exceeds that of Plan Y by €35,694 (€261,111 †€225,417).\r\n1.3 Analysis of real excerption info for plans\r\n1.3.1 Net Present Value Method\r\nPLAN X\r\nDetails\r\n0\r\ n€’000\r\n1\r\n€’000\r\n2\r\n€’000\r\n3\r\n€’000\r\nInitial Investment\r\n(2,700)\r\n \r\n \r\n \r\nCash Flows\r\n \r\n470\r\n610\r\n950\r\nNet Cash Inflow/(Outflow)\r\n(2,700)\r\n470\r\n610\r\n950\r\n13% Discount Rate\r\n1.0000\r\n0.88496\r\n0.78315\r\n0.69305\r\nPresent Value\r\n(2,700)\r\n415.931\r\n477.722\r\n658.398\r\nNet Present Value: -€1,147,949 + (€100,000 x 25%) = -€1,122,949\r\nPLAN Y\r\nDetails\r\n0\r\n€’000\r\n1\r\n€’000\r\n2\r\n€’000\r\n3\r\n€’000\r\n4\r\n€’000\r\n5\r\n€’000\r\nInitial Investment\r\n(2,100)\r\n \r\n \r\n \r\n \r\n \r\nCash Flows\r\n \r\n380\r\n700\r\n800\r\n600\r\n1,200\r\nNet Cash Inflow/(Outflow)\r\n(2,100)\r\n380\r\n700\r\n800\r\n600\r\n1,200\r\n15% Discount Rate\r\n1.0000\r\n0.86957\r\n0.75614\r\n0.65752\r\n0.57175\r\n0.49718\r\nPresent Value\r\n(2,100)\r\n330.437\r\n529.298\r\n526.016\r\n343.050\r\n59 6.616\r\nNet Present Value: €225,417 + (€500,000 x 20%) = €325,417\r\nSource: Lucey T. 2003, p 416.\r\n1.3.2 Comparison of real option plans with original plans\r\nIf we consider and return the real options available, Project Y becomes the best project, on the contrary of the conclusion noted in sub-section 1.2.2. It is also worth nothing that the application of the real option for Plan X is not financially executable because we will end up with a negatively charged net present value. If we comp be the net present value of Plan Y under the real options scheme with the net present value of Plan X we ignore deduce that Plan Y real options project is more feasible than the other plan since the net present value is €64,306 higher [€325,417 †€261,111].\r\n1.4 Effect of crown Rationing\r\nCapital confine is an absolute restriction on the amount of pay available for a project irrelevant of cost. This should not be confuse with scarcity of economic resources. Capital ration on projects is sometimes applied plain though the organization posses or can gain available pay. For example, a capital rationing whitethorn be imposed on the amounts of debts an organisation can take in order to limit the gearing of the firm (Brockington R. B. 1996, p 151).\r\nWhen conditions of capital rationing be imposed, there is the possibility that the most optimum project is not selected. Therefore yes capital rationing whitethorn effect the selection of Plan X or Plan Y. For example if a capital rationing is adopted by the firm which states that the initial investment cannot exceed €2,000,000 due to its effect on gearing.\r\n chthonic such conditions no Plan would be selected by the firm. Another example of capital rationing that will affect the project choice is if caution resolute to restrict expansion of the factory, because they fear that control on employees may be lost affecting negatively their relationship and co ntrol on staff. In this case Plan X would be excluded, even though it is the most optimal project as denoted in sub-section 1.2.2., and the available choice would be Plan Y.\r\n1.5 monetary instruments available for private companies\r\nThe alternative financial instruments that the firm can use, apart from sh bes are:\r\nCorporate Bonds & Debentures;\r\nOverdraft knack by the swan;\r\nBank bring;\r\nVenture capital; and\r\nLeasing\r\n1.5.1 Advantages and disadvantages of collective bonds/debentures\r\nThe advantages related to corporate bonds are (E*Trade Financial website):\r\nCorporate bonds are usually lent at a weeklong period of time (Veale R. S. 2000, p 155).\r\n touch on payments for bonds are tax deductible.\r\nInterest rates of corporate bonds are ofttimes lower than those of banks.\r\n theatrical role self-command of shareholders is not weaken by the issue of corporate bonds or debentures (Veale R. S. 2000, p 156)\r\nThe disadvantages encountered with corporat e bonds are:\r\nObligation of raise on the firm’s cash flow, and then increasing the risk of bankruptcy during periods of financial problems.\r\nUpon maturity, the company has to pay binding all the amount of the bond.\r\n1.5.2 Advantages and disadvantages of bank overdraft facility\r\nA bank overdraft facility can provide the following benefits (tutur2u website):\r\nAllows flexibility of finance. The company can increase the overdraft facility within acceptable limits.\r\nInterest is only charged on the amount used and is tax deductible.\r\nPercentage ownership of shareholders is not dilute by victorious an overdraft facility.\r\nThe disadvantages imposed by an overdraft facility are (tutur2u website):\r\nRates of interest are higher than those of bank loans.\r\nMoney due is repayable on demand.\r\nThe facility limit can be changed by the bank according to its discretion.\r\nUsually used for short borrowing.\r\n1.5.3 Advantages and disadvantages of bank loans\r\nThese are the advantages derived from bank loans (tutur2u website):\r\nLoan is repaid back in regular payments thus allowing better cash management.\r\nLower interest charged than bank overdraft.\r\nPercentage ownership of shareholders is not diluted by taking an overdraft facility.\r\nLarge amounts can be borrowed for long confines finance.\r\nLimitations of this type of finance are (tutur2u website):\r\nInterest has to be paid within a specified date.\r\nless(prenominal) flexible than an overdraft facility.\r\n1.5.4 Advantages and disadvantages of post capital\r\nThe advantages of venture capital are (Business Link website):\r\nObtain proficient management expertise, if they get involved in the firm’s operations.\r\nLarge sums of finance can be obtained from venture capital.\r\nThe disadvantages incurred by using such medium of finance are (Business Link website):\r\nRequire detailed financial reporting like business plans and financial estimates.\r\n good and accountancy fees are incurred in the negotiation process.\r\n warm require a proven track file to take such finance.\r\nHigh returns are frequently expected from venture capitalists.\r\n \r\n \r\n15.5 Advantages and disadvantages of leasing\r\nThe advantages obtained from leasing are (Enterprise. Financial Solutions website):\r\nProvides 100% financing of asset.\r\nThere is no need of address lines with banks and other depositary associations, which are hard to obtain.\r\nMinimal paperwork essential to acquire lease.\r\nActs as hedging against inflation.\r\nFlexible payments are allowed in leasing.\r\nInterest on leasing is not sphere to increases like bank overdrafts.\r\nThe disadvantages encountered through leasing finance are (Auto Leasing Software Lease Tips website):\r\nThe organisation is committed to the consummate validity period of the lease.\r\nHigh amounts of insurance coverage are frequently demanded in leases.\r\nNo ownership of the asset the firm is using in the project’s operations.\r\nReferences:\r\nAuto Leasing Software Lease Tips. Disadvantages of leasing (on line). on hand(predicate) from: http://www.autoleasingsoftware.com/LeaseTips/Disadvantages.htm (Accessed thirteenth parade 2007).\r\nBrockington R. B. (1996). Financial Management. Sixth Edition. capital of the unify Kingdom: DB Publications.\r\nBusiness Link. Equity Finance (on line). easy from: http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1075081582 (Accessed 13th March 2007).\r\nDrury C. (1996). Management and Cost Accounting. Fourth Edition. capital of the United Kingdom: Thomson Business water closet.\r\nEnterprise.Financial Solutions. Advantages of leasing (on line). functional from: http://www.efsolutionsinc.com/Advantages_of_leasing.htm (Accessed 13th March 2007).\r\nE*Trade Financial. Corporate Bonds Overview (on line). Available from: https://us.etrade.com/e/t/kc/KnowArticle?topicId=13200&groupId=8722&articleId=8723 (Accessed 13th March 2007).\r\nHirschey M; Pappas L. J. (1995). Fundamental of managerial Economics. fifth part Edition. Orlando: The Dryden Press\r\nHorngren T. C.; Foster G.; Srikant M. D. (1997). Cost Accounting †A Managerial Emphasis. Ninth Edition. London: Prentice-Hall International (UK) Limited.\r\nLucey T. (2003). Management Accounting. Fifth Edition. Great Britain: Biddles Ltd.\r\nPike R.; Neale B. (1999). Corporate Finance and Investment. triplet Edition. London: Prentice-Hall International (UK) Limited.\r\nRandall H. (1999). A Level Accounting. trio Edition. Great Britain: Ashford Colour Press Ltd.\r\nTutur2u. Bank Loans and Overdrafts (on line). Available from: http://www.tutor2u.net/business/gcse/finance_bank_loans_overdrafts.htm (Accessed 13th March 2007).\r\nVeale R. S. (2000). Stocks, Bonds, Options and Futures. Second Edition. United States of America: New York Institute of Finance.\r\n'