Mini Case in Finance and Accounting Study Example | Topics and Well Written Essays - 1500 words

Mini in Finance and Accounting - Case Study Example The incremental cash flows constitute the marginal benefit from the project. Therefore, the incremental cash flows are the increased value to the firm from accepting the project. It is suitable to take the total free cash flow into account rather than taking the total profits. b. Cash flow items do not include depreciation. However, depreciation affects the cash flows at various levels on the life of the project as it has effects on taxes, which in turn impacts the cash flows (Business Accounting Guide). Depreciation comes under the expenses items and when the amount of depreciation incurred increases, the expenses also increase in proportion. On such a situation, the accounting profits get diminished. c. The sunk costs are ignored while assessing the capital budgeting proposal. The company as a whole concentrates only on the incremental after-tax cash flows, or free cash flows. The decision made on the investment at hand is not regarded as the sunk cost that would have already incur red. They are irrelevant and are not incremental cash flows and so they do not affect the determination of cash flows. d. The project’s initial cash outlay can be calculated by using the following formulae. Initial Cash Outlay = Cost of new plant & equipment + Cost of shipping & installation + Increase in working capital = $7,900,000+ $100,000+$100,000 = $8,100,000 e. The differential cash flows over the project’s life can be found out by adding Taxes to the amount of EBIT (Earning Before Interest and Taxes) and deducting the amount of Depreciation. The differential cash flows through the years are assessed as follows: Operating Cash Flow Statement Year 1 2 3 4 5 EBIT $6,500,000 $12,500,000 $14,900,000 $7,700,000 $2,900,000 Less: Taxes $2,210,000 $4,250,000 $5,066,000 $2,618,000 $986,000 Add: Depreciation $1,600,000 $1,600,000 $1,600,000 $1,600,000 $1,600,000 Differential (Operating) Cash Flows $5,890,000 $9,850,000 $11,434,000 $6,682,000 $3,514,000 f. The Terminal Cas h Flow means the cash flow that is accumulated at the end of the project life. It takes the net recovered value collected at the liquidation of the project into account. It consists of cash flow on account of the changes in net working capital but leaves out the operational cash flow from the previous year of the project. Usually, changes in the net working capital affect the cash inflow, which is the recovered amount of cash outflow taken into account at the starting of the project (Terminal Cash flow in capital budgeting decision, 2010). The Terminal Cash Flow is assessed using the following statement. Terminal Cash Flow = $5,914,000.00 Free Cash Flow Statement    1 2 3 4 5 Operating Cash Flow $ 5,890,000.00 $9,850,000.00 $11,434,000.00 $ 6,682,000.00 $ 3,514,000.00 Less: Change in Net Working Capital $ 2,000,000.00 $1,500,000.00 $ 600,000.00 $(1,800,000.00) $(2,400,000.00) Less: Change in Capital Spending $ - $ - $ - $ - $ - Free Cash Flow: $

Foundation of Organisation Coursework Example | Topics and Well Written Essays - 2000 words

Foundation of Organisation - Coursework Example One major problem that arises due to first growth is poor coordination. With a huge workforce working for the organization and a lot of resources being utilised to ensure high productivity, there are high chances of poor coordination setting in. Although the company might record increased sales, this does not automatically mean that the company is becoming more profitable. The organization may in fact be spending more to achieve less. In this respect, there are chances that lack of proper coordination could lead to cash flow shortages, which at first may be subtle and easy to ignore but with time, expenses will start exceeding revenues at a higher pace with each new month of business growth.   Under this circumstance, the company then begins to haemorrhage and becomes less profitable. Although hiring more employees results in increased production, it could negatively affect its performance. This is mainly because as the number of employees increases, the company and its principles begin to loose touch with the key employees, most of whom are more experienced, well trained and are more depended on by the company. Such employees will suffer greatly from loss of job satisfaction, become demotivated and could even quit the company. Having many employees could also lead to unproductive divisions that could strain its profitability and performance. As they try to control increased business activities and increased employee base, the management could lose track of the business functions that are more essential and this directly impairs its performance. The other potential problem that fast growing firms could encounter as they grow is lack of proper business planning. This problem mainly arises because the decision to expand in such companies is driven by the desire for personal/company satisfaction and the need to take advantage of available business opportunities instead of economic analysis, market studies and sound financial evaluation. As a result of this, the management of the company will end up creating for themselves a challenge beyond their capability and experience. Because of the improper motivations, such firms end up making rash decisions and developing projects or buy machinery that may not necessarily increase the profitability and performance of the company. Such projects or machinery could block the ability of the company to develop more appropriate projects or purchase more effective machinery due to incompatibility with the rashly established projects or acquired machinery. It could even lead to incompletion of these projects due to the problem of underfunding and this will have used funds for setting up more appropriate projects. Question 2: Solutions Solutions to loss of clear insight into the performance of the business and its profitability The company’s management must ensure that all its undertakings aim at supporting the core activities of the business. This means that the company must ensure that all the acti vities of various functions are properly coordinated. Good governance also plays a great role in the success of companies experiencing fast growth. The management of the organization should see to it that good decisions are made and that policies created by management apply throughout the organization. The company should limit all new projects to those it has the capacity and experience of handling. If not, it should hire people who are experienced and competent enough to handle such projects. This solution is crucial in