Question:
Describe about the context of the modern business scenario, financial accounting and financial management plays an effective role of RIST Ltd ?
Introduction to the company
In the given assignment, the organization RIST Ltd has been chosen. The main product of the given organization is a technology that can be used by several sports persons to measure and monitor their daily activities. In addition to this, it can be inferred that it is a new organization which has future plans to launch a smart watch in the current market segment.
In the present context of the modern business scenario, financial accounting and financial management plays an effective role. It can be further inferred that there are several financial decision making tools that are required to be evaluated by all the modern business organization (Carmona, 2012). In addition to this, it can be deduced that this assignment will reflect the analysis and feasibility of the tools and techniques with respect to the given organization. This report will also throw light on the evaluation of the feasibility of the smart watch that the organization is planning to launch.
Use of NET PRESENT VALUE and Internet Rate of Return
The capital budgeting tools of Irr and NET PRESENT VALUE is of great essence to determine the feasibility and success criteria of a given project or different projects. For example, NET PRESENT VALUE helps to determine the future value of the project and is a summation of net cash inflows and net cash outflows with respect to the initial investment and cost of capital of the project (Goel, 2015). In addition to this, it can be inferred that Irr can be defined as the total rate of return that the investor can expect to get after the completion of the given project. NET PRESENT VALUE also takes into consideration the rate of inflation and time vale of the project. Both the given capital budgeting techniques is of great essence to interpret the feasibility and reliability of the given project. If both these tools are on the positive side, then it can be inferred that the project is said to be positive and accepted in a great manner.
Cost of capital can be defined as the rate of investment that is required to fund any particular project. It can be also defined as the total opportunity cost of any particular project. The rate of cost of capital depends upon the allocation of funds of any organization with reference equity and debt. It can be also defined as hurdle rate which is required to be minimized for any particular project. Cost of capital is directly linked with the above methods of NET PRESENT VALUE and Irr (Kocherlakota, 2010). While calculating NET PRESENT VALUE of a project, the rate of cost of capital is used. In the same way, higher cost of capital will directly decrease the rate of Irr. If NET PRESENT VALUE is less than 0, then Irr will be less than the cost of capital. On the contrary, if NET PRESENT VALUE is more than zero, then Irr will be the cost of capital.
From the excel spreadsheet, it can be deduced that the NET PRESENT VALUE project Borkell is coming to be $22661 and Irr of Borkell project is coming to be as 15 percent (Refer to Appendix 1). On the other hand, in case of the project index, NET PRESENT VALUE is coming to be-73,491 and Irr is coming to be as 15 percent (Refer to appendix 2)
From the above analysis, it can be deduced that the firm will be profitable in case of the project Borkell. In addition to this, since NET PRESENT VALUE of the given project is coming to be as 22661 and Irr of the project is coming to be as 15 percent, therefore, it can be deduced that the project will be accepted. On the other hand, in case of project index, both NET PRESENT VALUE and IRR are coming to be negative, therefore, the first project can be considered as feasible in nature. Therefore, it is recommended for the organization to select the project Borkell as it will incur positive returns of the given project. On the other hand, non-financial factor may include factors like feasibility and overall duration of the given project. Due to this reason, it is of great essence, to incorporate the project Borkell for the organization RIST ltd on the basis of financial and non-financial factors.
It can be deduced that both the projects, that is the project Borkell and project impress will have a considerable impact on the working capital management of the project. Firstly, it can be inferred that project impress will have a positive impact on the working capital cycle of the organization. This is mainly because, the cash flows of the particular project is on the higher side. It further infers that the current asset of the organization is more than current liabilities of the organization (Mowen, Hansen & Heitger, 2014). In addition to this, the working capital cash is also positive for the given particular project. On the other hand, in case of project impress, though the initial cash flows are on the positive side, but, the total cash inflows are less than the total cash outflows. On the other hand, due to this major reason, the NET PRESENT VALUE and Irr of the project is coming to be negative.
The given short term sources of finance include overdraft, short term loans and factoring of accounting receivable. In case of overdraft, the financial leverage of the organization will be on the higher side. In case of short term loans, the rate of interest will be high, but, it is preferable for the organization as it is a growing new firm. Therefore, it is recommended for the organization to opt for short term financial loans to meet up the short term debts and short term working requirements of the organization. In addition to this, it is not preferable for the organization to select accounts receivable as it is for long term purpose. This is mainly because; the project requires mainly short term capital requirements in order to meet the requirements of its working capital cycle. In addition to this, it can be deduced that short term loans are generally paid on the basis of short term interest rates. Therefore, the debt structure of the organization will be on the lower side and the short term requirements can be easily fulfilled (Whitecotton, Libby & Phillips, 2014).
From the NET PRESENT VALUE of the project impress, it can be deduced that NET PRESENT VALUE in case of is -75132 and in case of purchasing option, the NET PRESENT VALUE of Impress project is coming to be as -8403. For this reason, it can be deduced that the option of purchase, is more preferable for the organization in comparison to the leasing option by keeping cost of debt as 8 percent. Though, it can be deduced that both the NET PRESENT VALUE is coming to be negative, still the option of purchase can be considered to be more preferable.
From the above analysis of NET PRESENT VALUE of the leasing and purchasing options of the project, it can be deduced that it is preferable for the organization RIST ltd to opt for purchasing option, rather than going for the option of lease. There are several financial and non-financial factors that are involved behind the given case. The financial factors can be concerned with the aspect of the structure of working capital management of the organization. In case of leasing option, the cash flows of the organization will decline in comparison to the options of purchase. In addition to this, the amount of debt that will require for the option of lease will be higher in comparison with the option of purchase. Due to this reason, it is important for the organization to directly purchase the machine to get the benefits of the salvage value. In addition to this, it can be also deduced that though the total duration of the project is only 5 years, still the organization is required to take effective steps towards working capital cycle. In case of non-financial factors, the duration of the project and feasibility can be taken into consideration (Bank, 2010)
Conclusion
From the above analysis, it can be deduced that the organization is required to manage its working capital cycle. In accordance to this, it must choose short term debt to meet the short term debt requirements. In addition to this, the organization must choose purchasing option of the machine for financial and non-financial requirements.
References
Bank, W. (2010). Global Development Finance 2010. Washington: World Bank.
Carmona, R. (2012). Numerical methods in finance. Berlin: Springer.
Crosson, S. (2014). Managerial accounting. South-Western Cengage Learning.
Goel, S. (2015). Capital Budgeting. Business Expert Press.
Holland, J., & Torregrosa, D. (2008). Capital budgeting. [Washington, D.C.]: Congress of the U.S., Congressional Budget Office.
Journal of Financial Reporting & Accounting. (2010). Managerial Auditing Journal, 25(6). doi:10.1108/maj.2010.05125faa.001
Journal of Financial Reporting & Accounting. (2010). Managerial Auditing Journal, 25(4). doi:10.1108/maj.2010.05125daa.001
Kocherlakota, N. (2010). The new dynamic public finance. Princeton: Princeton University Press.
McMillan, E. (2010). Not-for-profit budgeting and financial management. Hoboken, N.J.: Wiley.
McMillan, E. (2010). Not-for-profit budgeting for nonprofit organizations. Hoboken, N.J.: Wiley.
Mowen, M., Hansen, D., & Heitger, D. (2014). Cornerstones of managerial accounting. Mason, OH: South-Western Cengage Learning.
Peterson Drake, P., & Fabozzi, F. (2002). Capital budgeting. New York, NY: Wiley.
Whitecotton, S., Libby, R., & Phillips, F. (2014). Managerial accounting. New York, N.Y.: Mcgraw Hill/irwin.
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