Financial Analysis for Managers Research Paper

Financial Analysis for Managers - Research Paper Example c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects Which project is most attractive to a firm that is limited in the funds it can raise c) Project B would be the choice for a firm with no hassle in arranging funds. The reason being that though the project has a lower Profitability index and even a lower NPV but its consistent cash flows could be attractive for big investors. Such investors are called Mutually Exclusive. How ever when the funds are limited, then Project A would be the choice as the Profitability Index and NPV are both favorable and this shows the best method to use the funds efficiently. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and will be depreciated straight-line over 5 years to a salvage value of $20,000. Kinky anticipates that the machine actually can be sold in 5 years for $30,000. The machine will save $20,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $10,000. The firm's marginal tax rate is 35 percent, and the discount rate is 8 percent. Should kinky buy the machine .. = $ 12.17 Thus from the calculations it is evident that Project A has a higher NPV. b) Profitability Index Formula = Present value of the cash flows/ initial investment. Profitability Index for Project A = (18.182 + 16.528 + 15.026)/36 = 1.38 Profitability Index for Project B = (22.7275 + 20.66 + 18.7825)/50 = 1.24 Hence the Profitability Index for Project A is higher. c) Project B would be the choice for a firm with no hassle in arranging funds. The reason being that though the project has a lower Profitability index and even a lower NPV but its consistent cash flows could be attractive for big investors. Such investors are called Mutually Exclusive. How ever when the funds are limited, then Project A would be the choice as the Profitability Index and NPV are both favorable and this shows the best method to use the funds efficiently. Q.23. Project Evaluation. Kinky Copies may buy a high-volume copier. The machine costs $100,000 and will be depreciated straight-line over 5 years to a salvage value of $20,000. Kinky anticipates that the machine actually can be sold in 5 years for $30,000. The machine will save $20,000 a year in labor costs but will require an increase in working capital, mainly paper supplies, of $10,000. The firm's marginal tax rate is 35 percent, and the discount rate is 8 percent. Should kinky buy the machine Ans. 23 In this Project evaluation, we will go step by step to analyze the acceptance of this machine by the firm. First we will take in consideration all the costs of this project. 1) The Depreciation cost. Depreciation (Straight Line) formula = Total cost - salvage value/number of years to be used. Depreciation for the copier = 100,000 - 20,000/5 = 16,000 Thus the total