CASH FLOW ANALYSIS
Cash Flow Analysis
Leveraging is defined as the use of borrowed capital to carry out business in hope of getting returns to repay. A limited leverage is important because financial leveraging allows a strong access to capital. To start, people of companies who do not have the initial capital, leveraging can help one kick start the business if used wisely. However, there should be limits on the amount of leverage to expose your business as it comes with risks. For businesses that are already started, leveraging assists in capital injecting and ensures the continuity of the business. When used successfully, leveraged finance may help businesses gain more revenues and profit that may not be possible if it is not …show more content…
Even before a loan is given, the bank will always check the financial statements of a business or the person asking and evaluate it 's activity and growth. From the financial analysis that was done, the bank will not be able to finance the business because it is not profitable and it will not risk default payments due to visible risks. Ethical issues will arise because, the bank manager will find that Frank’s business is not worth advancing a loan, however because they are family friends he will find himself willing to assist and that will cause an ethical dilemma. Stephanie, through the capital budgeting techniques below can be able to convince her mother that even the bank manager will not …show more content…
In other words, it is the rate at which NPV is zero.
If the IRR of a project exceeds the set rate, that project can be undertaken. Otherwise, do not initiate the project as it is impossible. In our case the IRR is (17.00%) more than the set one (12%). This is the ratio of present value of a project’s cash flows to the initial investment. A profitability index figure that is greater than 1 indicates a viable project and is in tandem with a net present value greater than zero. “If profitability index is zero one is unable to make a clear decision. If less than 1, do not undertake the project.
Profitability index= Present value of all future cash flows / Initial investment required. From the above analysis, all the capital budgeting techniques have indicated that the investment is not worth taking, starting with a NPV of - $28,682, an internal rate of return of 17% less than the projected rate, a profitability index of (1.13) less than 1 and a discounted payback period of more than 8 years, which is the set period of investment. I would advise Frankie to close the truck business and channel his money to another profitable avenue. Continued undertaking of the truck business will continue making losses and consuming more cash which would have been invested
Cash Flow Analysis
Leveraging is defined as the use of borrowed capital to carry out business in hope of getting returns to repay. A limited leverage is important because financial leveraging allows a strong access to capital. To start, people of companies who do not have the initial capital, leveraging can help one kick start the business if used wisely. However, there should be limits on the amount of leverage to expose your business as it comes with risks. For businesses that are already started, leveraging assists in capital injecting and ensures the continuity of the business. When used successfully, leveraged finance may help businesses gain more revenues and profit that may not be possible if it is not …show more content…
Even before a loan is given, the bank will always check the financial statements of a business or the person asking and evaluate it 's activity and growth. From the financial analysis that was done, the bank will not be able to finance the business because it is not profitable and it will not risk default payments due to visible risks. Ethical issues will arise because, the bank manager will find that Frank’s business is not worth advancing a loan, however because they are family friends he will find himself willing to assist and that will cause an ethical dilemma. Stephanie, through the capital budgeting techniques below can be able to convince her mother that even the bank manager will not …show more content…
In other words, it is the rate at which NPV is zero.
If the IRR of a project exceeds the set rate, that project can be undertaken. Otherwise, do not initiate the project as it is impossible. In our case the IRR is (17.00%) more than the set one (12%). This is the ratio of present value of a project’s cash flows to the initial investment. A profitability index figure that is greater than 1 indicates a viable project and is in tandem with a net present value greater than zero. “If profitability index is zero one is unable to make a clear decision. If less than 1, do not undertake the project.
Profitability index= Present value of all future cash flows / Initial investment required. From the above analysis, all the capital budgeting techniques have indicated that the investment is not worth taking, starting with a NPV of - $28,682, an internal rate of return of 17% less than the projected rate, a profitability index of (1.13) less than 1 and a discounted payback period of more than 8 years, which is the set period of investment. I would advise Frankie to close the truck business and channel his money to another profitable avenue. Continued undertaking of the truck business will continue making losses and consuming more cash which would have been invested