FINANCIAL TOOLS

for
STRATEGIC CHOICE
Chapter 7
FINANCING TOOLS
 Advantages
• Easy to compute and
understand
• Provides a preliminary
quantitative analysis of
strategic alternatives
• It is a good surrogate for risk. • Does not account for other
(A quick payback period
indicates a less risky project.)
Limitations
• Does not account for the time
value of money
• Assumes a constant level of
forecasted cash inflows
opportunities foregone by
choosing the strategy in
question
 ADVANTAGES LIMITATIONS
• Easy to compute and • Does not consider the time
understand value of money
• Indicates the project’s • The effect of inflation is
profitability ignored
A positive NPV indicates that the cash flows generated by the
strategic initiative over its economic life will:
1. Recover the initial outlay
2. Recover any additional capital costs included in the
analysis
3. Earn the desired/required rate of return on investment
4. Provide a cushion in case the future differs from
expectations.
 ADVANTAGES
• Emphasizes cash flows
• Recognizes the time value of
money
• Assumes discount rate as the
reinvestment rate
LIMITATIONS
• It requires predetermination of
the cost of capital or the discount
rate to be used.
• The net present values of different
competing projects may not be
comparable because of differences
in magnitudes or sizes of the
projects.
FORECASTING THE FINANCIAL
RESULTS OF STRATEGIES
SOURCES OF FUNDS FOR
STRATEGIC INITIATIVES
 Sources of Funds Funds Acquisition Options
Internal Funds Generation 1. Retention of Net
Income/Recycling free cash
flows
2. Divestment with Reinvestment
3. Retrenchment
External Funds Acquisition 1. Debt Incurrence
• Financial Institution borrowing
• Public Debt securities sale

2. Issuance of Equity Securities

Agustin, Ieva Francheska F.
Dionisio, Joseph Christopher
Garcia, Kyle Marinee
Mamangun, Hannah Grace
Paraiso, Rodney
Tiu, Roxanne Joy

Group 3