The components of financial management Coursework

The components of financial management - Coursework ExampleYear Cash flow Discount factor Present rate 0 (? 2m) 1 (? 2m) 1 (? 1.5m) 0.909 (? 1.3635m) 2 ? 1.0m 0.826 ? 0.826m 3 ? 1.3m 0.751 ? 0.9763m 4 ? 1.8m 0.683 ? 1.2294m 5 ? 1.3m 0.621 ? 0.8073m 6 ? 0.6m 0.564 ? 0.3384m ? 0.8139m The NPV of the confuse is ? 0.8139m. This is a positive amount and therefore is an indicator that the pop the question can be carried on. Section II Associated risks of the project The risk associated with a project may be defined as the variability that is likely to decease in the future returns from the project. assay arises in investment evaluation because we cannot anticipate the occurrence of the possible future events with certainty and consequently, cannot make any correct prescience about the currency flow sequence. In the context of capital budgeting projects, risk results al most(prenominal) entirely from the uncertainty about future exchange inflows, because the initial cash outflow is generally known. These risks result from a variety of factors including uncertainty about future revenues, expenditures and taxes. Therefore, to assess the risk of a potential project, the analyst needs to approximate the riskiness of the cash inflows. There are three possible attitudes towards risk that can be identified. These are (a) Risk aversion (b) Desire for risk (c) languor to risk A risk averter is an individual who prefers less risky investment. The basic assumption in financial theory is that most investors and managers are risk averse. Risk seekers on the other hand are individuals who prefer risk. Given a choice between more and less risky investments with identical expected fiscal returns, they would prefer the riskier investment. The person who is indifferent to risk would not care which investment he or she received. There are various risks involved in the project that have different degrees of consequences. Such risks may be categorized into technical risks, envi ronmental risks, economic risks, political risks and project completion risks. (Horngren, Foster, & Datar, 2001) The risks that any project is incline can be avoidable or unavoidable and therefore a firm has to minimize the risks that face the projects it undertakes as much as possible. The project that is intend to be carried out can face the risk of errors in estimation. Such errors could disrupt the catalogue of the whole project as a whole if the occupancy and development teams do not work closely to curb such cases of errors. There is also the possibility that there can be a requirements overload whereby the requirements for the project are not well established and are therefore constantly being added later on during the development phases of the project. This disrupts the laid down schedule and delays the events of each step of the project. Lack of proper documentation of the project at the same time as the project progresses is also a risk that most projects face since cr itical information related to the project may be lost. PART B Section I Beck Bag Year Expected cash flows Accumulated cash flows 1 60,000 60,000 2 70,000 130,000 3 70,000 200,000 4 40,000 240,000 5 20,000 260,000 The project costs 200,000 and the amount is recouped in the third year, therefore the payback bound is 3 years. Roo Bag Year Expected cash flows Accumulated cash flows 1 70,000 70,000 2 70,000 140,000 3 60,000 200,000 4 60,000 260,000 5 60,000 320,000 The project costs 260,000 and it takes 4 years to recoup this amount. Therefore the payba