Financial Management

FINANCIAL MANAGEMENT

Introduction
Finance has significance in business cycle, as well as the management of Finance in an efficient way of method hel s to attain the assumed ob!ecti"es of in"esting in shareholders, em loyees, customers, creditors, managers and society$ %A&T ' (A) ro!ects, raising shareholders "alue, finance raising and managing ris# in order to full fill the res onsibility to the

*arious A

raisal Techni+ues
raisal Techni+ues e,isting and it used for the ur ose to #now about an raisal Methods are as

There are "arious A follows$

in"estment generate "alue for shareholders or not$ (Arnold, -../)$ The A

0tate of the Art Techni+ues and Traditional A (A)Earning 1ased Measures

'$ N%* (Net %resent *alue)

raisal Techni+ues$

N%* is an im ortant tool in the 2CF(2iscounted Cash Flow) and it is a standard method of a raising long term ro!ects considering time "alue of money, as well as used in ca ital budgeting and it measures the cash flows$ The traditional Formula for N%* I0 , N%*3 F. 4 F'5('46)n , the net resent "alue deri"ed by discounting the future net cash inflows that reflects the "alue of alternate choice and use of the amounts that summing them o"er the life of the ro osal and subtracting the initial outlay$ (*ernimmen, -..7) -$ Accounting 5A"erage &ate of &eturn (&eturn on Ca ital Em loyed) Accounting5A"erage rate of return is a "ital financial ratio used for ca ital budgeting$ This ratio not considering the time "alue of money, it considered the return of ro osed in"estment$ A&& measures the return in ercentage that how much ercentage it earns out of each ound in"ested$

2 If the A&& is e+ual or greater than the re+uired ercentage of rate of return, the ro osal is acce table$ The formula for in"estment basis is$ A&&3 a"erage annual rofit (after de reciation)5initial ca ital in"estment , '..$ It is sim ly using the financial accounting rules to Measure the rofitability of the in"estment and not considering the o a roach$ ortunity or rele"ant cost

8$ Internal &ate of &eturn The I&& is an im ortant ro!ect a raisal and it thin# about the time "alue of money, as well as

it consider the rate of interest that recei"e if in"est in a ro!ect and it e, lains the e,cess of income o"er e, enditure annualised ercentage on the basis of the timing of the flows of cash$ It re resents the correct rate of interest rate earned for the in"estment o"er the useful eriod$ It is the discount rate that ro"ides the 9ero Net %resent *alue$ I&&3&'4 (N%*'5N%*':N%*- ; '..) The ro!ect a raisal and decisions is the com arison of the in"estment and return of the ortunity cost is the sacrifice of the return obtainable on the

in"estment and the in"estors o other alternati"e$ (Arnold, -../)$

(1)&is# 1ased Measures

'$ %ay 1ac# %eriod It is a sim le and easy method of ro!ect a method it su raisal and rarely using as rimary, as a secondary

orts the other com licated methods and it seems illogical to em loy it when the

e,amined in segregation$ It is the time re+uired for re:cou e the initial in"estment$ The acce tance and re!ection olicy of the ro!ect de ends on the decision of management based on the acce table aybac# eriod decided by management and if the aybac# eriod is less than the acce table eriod , acce t the ro!ect and otherwise "ice "ersa$ -$1rea# E"en Analysis 1rea# E"en %oint is the oint of cost and re"anues become e+ual, as well as there is no rofit or loss made, similarly the o E;%EN0E0 3 &E*AN<E$ Financial Management ortunity costs are ha en and the ca ital recei"ed and ris# ad!usted$

3 Time is money and today=s one > is better than tomorrows one >$ The sacrification and its com ensation consists atleast of three elements of Time, Inflation and &is#$ The rate of e,change of future consum tion and -..7) Inflation in"ol"ed with the rice of time or the interest rate needed for com ensation of time that e,ists in between the resent consum tion and ost: oned consum tion, for that the ro"iders has right to get com ensated for loss in urchasing ower and time$ ?b!ecti"e 2ecision In uts The in"esting Acti"ity for a ro osed ro!ect and creation of wealth Cash flow Time "alue of money resent consum tion is called ure rate of interest$ (*ernimmen,

2ecision Analysis

2iscounted Cash flow

%ro!ect A

raisal Techni+ue

Answer

yes

No

The Assum tions made for the Calculation of the rediction of Income 0tatement and Cash Flow 0tatement of M50$ AL%@A Ltd$
'$ The cast:coal mine treated as an indi"idual ro!ect of M50$ Al ha Ltd and all ossible

e, enses and in"estments charged to the indi"idual ro!ect$ -$ The &oyalty e, enses incurred in the first year > -$A/ Million a the initial ayment is treated as Ca ital In"estment by @ead ?ffice$ 8$ The sur"ey cost is a total of only .$BB million and it charged in the e, enses of first year of o eration out of the inflow of the same year$ B$ The machinery cost of > '8$A/ million is a Ca ital In"estment and the 0cra "alue of > -$A/ ad!usted with inflow of cash in the fourth year, further the ro"ision for de reciation created e"ery year$ ortioned to four years and

Financial Management

4 /$ Cages and salaries fully charged in the first year of o eration and the rest of three years reduced by >.$// million, because for the o eration of rest three years e+ual lent to that staff force not re+uired and their ser"ice used for other ro!ects$ D$ The @ead ?ffice E, enses for this ro!ect fully charged and classified into Administrati"e E, enses and Indirect E, enses$ A$ The interest charges are a E$ En"ironmental cleanu lied in each year without any ad!ustments$ ortioned to four years and created

charges of >.$BB million a

ro"ision from the first year of o eration$ 7$ The Cost of ca ital ta#en as '-F$ '.$ Ignored the ta,ation rules when calculating N%* such as, ta, ayable, ta, relief and written down allowance$ ''$ 0cra "alue ad!usted with the inflow of cash in the end of the fourth year of o eration$ '-$ Total Initial In"estment Treated as followsG:

Net Cash ro"ided by ? erations Cash Flows from in"esting acti"ities <sed For E+ui ment %re:%aid Loyalty E, ense re aid 0elling and distribution Net cash used in in"esting

-',D'/,...$..

H'8,A/.,...$..I H-,.D-,/..$..I H',.A-,/..$..I H'D,EE/,...$..I

'8$ The E, enses for o erations deri"ed from the sale of each year$ 'B$ The e, enses met by @ead ?ffice Accounted and considered to ay @ead ?ffice and all the cost for the ro!ect considered$ '/$ The initial selling and distribution e, enses treated as Ca ital in"estment by @ead ?ffice and ro"ision create d for to set off in each year$

Financial Management

CA0@ FL?C 0TATEMENT F?& M50$AL%@A $LT2, F?& T@E F?<& JEA&0 PREDICTED INCOME STATEMENT FOR M/S.ALPHA LTD FOR THE FO R !ERS
Cash Flows from o erating acti"ities -.'' Net Income &e"enues Ad!ustments to reconcile net
0ales CA0T0 AN2 C?AL0 F

-.''

-.'-

-.'F -,8D/,...$..
'..$.

-.'8

-.'8 F

-.'B

-.'B

','//,...$..
'.,8B.,...$.. '..$. .

E-/,...$..
7,8/.,...$. . 7,8/.,...$. '..$. . '..$. .

F H-,/E/,...$..I

'..$.. D,78.,...$.. '..$..

income to net cash ro"ided

'.,AE.,...$..

. '..$.

by o erating acti"ities '.,8B.,...$.. '..$. Total Accum$ 2e &e"enues reciation : E+ui ment -,A/.,...$.. %ayable toof @$? Cost 0ales
Costs TotalMaterial Ad!ustments

'A,D..,...$..

'.,AE.,...$..

-,A/.,...$.. .$..
.

-,A/.,...$.. .$..
.

D,78.,...$..

-,A/.,...$.. .$..

Labour Costs -,/8.,...$.. -B$BA Accrued E, ense for en"ironment ''.,...$..

-,-..,...$.. -.$B' ''.,...$..

-,8'.,...$.. -B$A' ''.,...$.. 88.,...$.. 8$/8 -,ED.,...$..

',B8.,...$.. -.$D8 H88.,...$..I -,-..,...$.. 8'$A/ -,B-.,...$..

88.,...$.. 8$'7 88.,...$.. 8$.D -.,BD.,...$.. -,ED.,...$..

Total Cost of 0ales

-,ED.,...$..

-A$DD

-,/8.,...$..

-8$BA

-,DB.,...$.

/-$8E 8,D8.,...$.. H'D/,...$..I BA$D8,8..,...$..

8$'A D$8/ 87$DE '$/7 '7$./ 7$7/$'D

. -E$-B Net Cash ro"ided by ? erations -',D'/,...$.. /,--/,...$.. 8,DE/,...$.. A,BE.,...$.. A-$8B E,-/.,...$.. AD$/8 D,A'.,...$. Gross %rofit Cash Flows from in"esting acti"ities . A'$AD

<sed For

E, enses
administration

E+ui e, ment ense(@$?) re

H'8,A/.,...$..I .$.. --.,...$.. -$'8 --.,...$.. H-,.D-,/..$..I .$..

-$.B B$.E -/$/' '$.'-$-B D$8E

.$.. --.,...$..
BB.,...$.. -,A/.,...$.. .$.. ''.,...$.. .$.. ',8-.,...$.. DEA,/..$..

-$8/ B$A' -7$B' '$'E 'B$'A$8/

.$.. --.,...$..
BB.,...$.. -,A/.,...$.. .$.. ''.,...$.. .$.. ',8-.,...$.. DEA,/..$..

IN2I&ECT %re:%aid &oyalty E, ense

E;%EN0E0(@$?) BB.,...$.. B$-D BB.,...$.. 2e reciation enses -D$D. -,A/.,...$.. aid 0ellingE, and distribution-,A/.,...$.. H',.A-,/..$..I .$.. ''.,...$.. '$.D ''.,...$.. H'D,EE/,...$..I .$.. '-$AA D$D/ ',8-.,...$.. DEA,/..$..

.$..

.$..

En"ironmental enses Net cash used in E, in"esting

ense financing acti"ities ',8-.,...$.. CashInterest FlowsE, from &oyalty E, ense %roceeds From 0elling and 2istribution Net cash used in financing DEA,/..$..

.$..
8/A,/..$.. 8$BD B,A8.,...$.. BB.,...$.. B$-D

.$..
8/A,/..$.. 8$8/,--/,...$.. .$.. .$..

.$..
8/A,/..$.. 8$E8,DE/,...$.. .$.. .$..

.$..

Net

E, ense increase 0ur"ey E, HdecreaseI enses

in cash

8/A,/..$.. H'D/,...$..I .$.. .$..

0ummary D,8-/,...$.. D'$'A /,EE/,...$.. /B$/7 /,EE/,...$. Total E, enses . D-$7B Cash 1alance at End of %eriod B,A8.,...$.. '',...,...$.. '/,A8.,...$.. Cash 1alance at 1eg of %eriod
Net Income
','//,...$..

EB$7-

.$..

''$'A

-,8D/,...$..

HB,A8.,...$..I H'',...,...$..I H'/,A8.,...$..I

I

-'$7B

E-/,...$..

E$E-

H-,/E/,...$..

/,EE/,...$.. '7,8D.,...$..

H8A$8.I

Net Increase H2ecreaseI in Cash

B,A8.,...$..

D,-A.,...$..

B,A8.,...$..

8,D8.,...$..

N%* F?& M50$AL%@A LT2 Financial Management

"
YEAR 0 1 2 & ' Net Cash flow (- 16 !!" 000#00 $ B,A8.,...$.. D,-A.,...$.. B,A8.,...$.. 8,D8.,...$.. Cost of capital at 12% 1 0#!%& 0#(%( 0#(12 0#6&6 NPV ARR)a*era+e annual profit,capital in*este- . 100 /herefore# ARR ) &(2'&!0,16!!"000 ) 22#06% Present Value (- 16 !!" 000#00$ ' 22& ! %0#00 ' %%( 1 %0#00 & &6( ( 60#00 2 &0! 6 !0#00 (- 1 %!( '!0#00 $

The decision rule for N%*

N%* (4) (:)

2ECI0I?N Acce t &e!ect

%A&T ' (1) T#e a$$%&$%iate a$$%ai'al (eci'i&n in)&l)e( an( (e$en(' *it# t#e c&m$a%i'&n &+ t#e m&ne, $-t int& an in)e'tment *it# a $%&$e% am&-nt &+ %et-%n an( t#e in)e't&%.' &$$&%t-nit, c&'t i' t#e 'ac%i+ice &+ t#e %et-%n t#at a)aila/le t& t#e /e't &t#e% alte%nati)e. 01lenA%n&l(2 23354.

T#e ca$ital in)e'tment a$$%ai'al tec#ni5-e

in)&l)e' t#at2 t#e c&%$&%ate manage%' ma6e 't%ateg,

$%&$&'al' *#en la%ge am&-nt &+ m&ne, in)&l)e( an( t#e e)al-ati&n &+ t#e'e 't%ategic (eci'i&n n&t -'ing t#e t%a(iti&nal ca$ital in)e'tment tec#ni5-e'2 /e'i(e' t#e e)al-ati&n c%ite%ia in)&l)e( *it# t#e '&-%ce &+ ca$ital2 ea%ning $e% '#a%e2 gea%ing %ati& an( e++ect &n '#a%e $%ice. T#e (e$a%tmental &% +-ncti&nal manage%' $%e$a%e in)e'tment $%&$&'al' %elati)el, 'mall am&-nt &+ m&ne, in)&l)e( an( t#e e)al-ati&n c%ite%ia /a'e( &n78
Earning 1ased Measures &is# 1ased Measures

Financial Management

9
' 8 A&& N%* I&& ' 8 B %ay 1ac# %eriod Gearing 1E% 0ensiti"ity of estimated(a)Ta,ation(b)Inflation(c)Ca ital &ationing

0ourceG #tt$7//***.t&n,'-%%i(ge.c&.-6/c-'t&m/-$l&a(/E/&&6'/3::23;0Acce''e( &n 3</::/23:34

T#e Aca(emicall, $%e+e%%e( a$$%&ac# i' Di'c&-nte( Ca'# Fl&* Met#&( *it# NP= /eing $%e+e%%e( t& IRR2 /eca-'e t#e DCF met#&(' ta6e int& c&n'i(e%ati&n &+ time )al-e &+ m&ne, an( c&%$&%ate %i'6 $%e+e%ence. 0Hea(2 23394 %A&T $1 The issues in"ol"ed in the In"estment A raisal

T#e Pa,/ac6 Pe%i&( Met#&( *a' -'e( t& mea'-%e t#e a$$%ai'al an( t#e $&$-la% t%en( n&* (a,' I' DCF 0Di'c&-nte( Ca'# Fl&* Met#&(4 +&% t#e in)e'tment a$$%ai'al. In 'mall &%gani'ati&n' al'& (ecline t& -'e t#e Pa, >ac6 Pe%i&(. IRR i' m&%e $&$-la% t#an NP= in 'mall C&m$anie'2 /-t NP= i' t#e m&'t $&$-la% in)e'tment a$$%ai'al met#&( in la%ge c&m$anie'2 'imila%l, t#e -'e &+ e?$e%ience an( 5-alitati)e @-(gement i' a )ital a'$ect &+ t#e 5-antitati)e met#&(2 /e'i(e' t#e Ret-%n &n Ca$ital Em$l&,e( i' t#e lea't $&$-la% a$$%ai'al met#&(. T#e +i%m' ten( t& n&t -'e t#e '&$#i'ticate( met#&(' an( m&'t &+ten 'en'iti)it, anal,'i' i' -'e(. 0ARNOLD2 23354 Cost of Ca ital T#e Net P%e'ent =al-e &+ (i++e%ent ca'# in+l&*' an( &-t+l&*' *ill a%i'e' in (i++e%ent $e%i&(' an( it i' e''ential t& calc-late (i'c&-nting %ate an( it i' calle( t#e c&'t &+ ca$ital2 in &t#e% *&%(' it i' t#e &++e% &+ a +i%m t& it' +inancial $%&)i(e%' t& enc&-%age t#em t& /-, an( #&l( a +inancial 'ec-%it,. 01lenA%n&l(2 23354. 0$.2:24. t#e c#&ice &+ in)e'tment (e$en(' /et*een )a%i&-' @-(gement' &n %ange &+ i''-e' '-c# a'7 8 :.A$$%&$%iate Ri'6 P%emi-m. 2. Financial 1ea%ing Le)el. 3. Ri'6 Mea'-%e. T#e ca$ital gene%ate( t#%&-g# (i++e%ent *a,' an( t#e main +&%m i' e5-it, an( (e/t2 i+ a +inance $%&)i(e% c#&&'e' (e/t +inance t#e%e i' c#ance t& %e(-ce %i'6. T#e +i%m can c&nt%&l t#e gea%ing2 '-c# a' (e/t t& e5-it, le)el &% can maintain inte%e't c&)e% %ati&. T#e c&m$an, m-'t %ai'e t#e ca$ital /, t#e /e't an( c#ea$e't *a, &+ met#&(. T#e &$timal +inance mi? $%&)i(e' /ene+it' t& 'ta6e#&l(e%'. Cost of indi"idual sources of finance '$ ?rdinary 0hares$ Financial Management

< E5-it, Finance can %ai'e /, i''-ing '#a%e' &% -'ing t#e %etaine( ea%ning'2 t#e c&'t &+ e5-it, i' a' +&ll&*'78 Ae, B D3 0:Cg4/P3Cg2 *#e%e.)eBc&'t &+ e5-it,2 D3Bc-%%ent (i)i(en( &% (i)i(en( t& /e $ai( '#&%tl,2 gBe?$ecte( ann-al g%&*t# %ate in (i)i(en('2 P3Be? (i)i(en( '#a%e $%ice. T#e %etaine( ea%ning' #a)e a c&'t e5-al t& t#e c&'t &+ e5-it,2 /-t %etaine( ea%ning' i' a '&-%ce &+ ca$ital *it# n& 'e%)icing c&'t2 /-t t#e%e i' &$$&%t-nit, c&'t a' e5-al t& t#e e5-it,. 0Hea(2 23394 -$%reference shares T#e (i)i(en( $ai( +&% t#e $%e+e%ence '#a%e' a%e c&n'tant '& t#e calc-lati&n +&% t#e c&'t &+ ca$ital i'78 Ai$'B(i)i(en( $a,a/le/ma%6et $%ice 0e? (i)i(en(42 *#en %ai'ing t#e $%e+e%ence '#a%e' t#e calc-lati&n (i++e%' an( gi)e c&n'i(e%ati&n t& t#e i''-e c&'t'. 8$ 2ebentures, loan stoc#s and other con"ertibles. I%%e(eema/le /&n(' an( i%%e(eema/le $%e+e%ence '#a%e' c&'t &+ ca$ital calc-late' in 'ame *a, an( t#e inte%e't $ai( &n i%%e(eema/le /&n(' a%e ta? (e(-cti/le2 it #a' a /e+&%e an( a+te% ta? c&'t &+ (e/t. >e+&%e ta? c&'t i%%e(eema/le /&n('. Ai( B Inte%e't Rate Pa,a/le/Ma%6et P%ice &+ >&n(. A+te% ta? c&'t i%%e(eema/le /&n('. Ai( 0A+te% ta?4 BAi( 0: D C%4 EACC 0Eeig#te( A)e%age C&'t &+ Ca$ital4 A+te% l&cating t#e in(i)i(-al c&'t &+ ca$ital2 it +&ll&*' t#e calc-lati&n &+ +i%m.' &)e%all Eeig#te( A)e%age C&'t &+ Ca$ital. T#e +&%m-la i'78
0CC B Ce ? E C A(0: D CT4 ? D 0 D C E4 0D C E4

Ae,B C&'t &+ E5-it,2 EB )al-e &+ e5-it,2 ADB /e+&%e ta? c&'t &+ (e/t2 CtB c&%$&%ati&n ta?ati&n %ate2 DB =al-e &+ (e/t. 0Hea(2 23394

&is# Ri'6 in)&l)e( *it# a $%&mi'e &+ t#e m&ne, a+te% a ce%tain $e%i&( #&l(' t#e %i'6 an( Ma, it n&t $a, &-t &% le''e% t#an t#e $%&mi'e( am&-nt al'& a++ect t#e $&''i/le )al-e' an( in+lati&n'. T#e +inancial a$$%ai'al tec#ni5-e' $%&)i(e an &$$&%t-nit, t& a$$%&ac# t#e +-t-%e an( t#e%e i' n& $%eci'e +&%eca't &)e%

Financial Management

; t#e +-t-%e %et-%n2 a' *ell a' it i' /ette% t& +&%eca't t#e $&''i/le +l&*' &+ ca'# t& '&l)e t#e e?$ectati&n'2 it i' ce%taint, an( -nce%taint,. 01lenA%n&l(2 23354

Conclusion
T#e Financial A$$%ai'al Tec#ni5-e' lea(' t& t#e '&l-ti&n +&% -nce%taint, &+ in)e'tment &$$&%t-nitie' 2 a' *ell a' t#e (i++e%ent a$$%ai'al met#&(' $%&)i(e' '&l-ti&n' +&% t#e (ilemma &+ in)e'ting in $%&@ect' an( t#e%e a%e a()antage' an( (i'a()antage' +&% (i++e%ent a$$%ai'al tec#ni5-e' 2 +-%t#e% t#e%e a%e i''-e' in in)e'tment a$$%ai'al'. T#e c&'t &+ ca$ital an( %i'6 in)&l)e( in in)e'ting acti)itie' a%e t#e +act +ace( /, &%gani'ati&n' an( t#e &$tim-m ca$ital mi?t-%e an( t#e a$$%&$%iate in)e'ting acti)itie' lea(' a +i%m t& ac#ie)e t#e &%gani'ati&nal g&al' an( meet t#e &/ligati&n t& t#e 'ta6e#&l(e%'. &eferences
A%n&l(2 1. 023354. The Hand Book Of Corporate Finance 0$$. 3"84; 2 ":89:22::825:4. L&n(&n7 P%entice Hall. Pie%%e =e%nimmen2 e. 0233;4. C&%$&%ate Finance T#e&%, An( P%actice. 1%eat >%itain0 $ :528:942 24:82922 35;8 3;34F&#n Eile, G S&n'2 Lt(. Hea(2 D. E. 023394. CORPORATE FINANCE 04 e(.4. ESSEH2 EN1LAND.

E>&&6'
appraisal of investment projects Cambridge University Press. (pp. 150) D Dayananda app%ai'al !rons " #arrison $ % #erbo&n $ P o'land( )00)( Capital *+dgeting, -inancial

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Financial Management