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Economic Analysis And Methodology

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Question:

Discuss about the Economic Analysis And Methodology.
 
 

Answer:

Introduction

This project report will be developed on the basis on assignment 1. As in the previous assignment literature review on project economic analysis and methodology has been done and in this paper financial model will be developing that includes assumptions, risks, cash flows i.e outflows and inflows, constraints, interest rate and the further economic analysis and after that on which basis financial model will be developed. This report is developed in relation with providing a proper set of information related. It is required that the previous aspects related with the project should be focused upon in an appropriate manner so as to ensure that the project could get completed accurately with less investment. This report will also avail the information related with cash inflows and the outflows so that projects could be completed in a proper manner and assurance could be made that less investment will be done and more return will be earned by the company on a particular project.

In this project report, option pricing financial model will be taken as this is suitable for the undertaken project report.

 

Financial Model Of The Case Project

Option pricingfinancial model - This model is used to calculate the value of company stock like theoretical values of option. This model is useful for the organization to calculate the value of underlying prices, strike prices as well as to predict the future value of some factors like calculating the theoretical value of the particular options for a particular time period. As the value of options keep fluctuating according to the option life.(Pandey, 2008).

Assumptions including interest rates, inflation, project life

Various assumptions are behind the Option Pricing model, some of the assumptions are as follows-

  • Continuous Volatility- one of the most beneficial assumption of this model is volatility, an evaluation of quantity of stock could be expected to move in upcoming period is stable over a time.
  • Constant interest rates and known- In this model, one of the important assumptions is about the constant interest rates. In order to represent the known and constant rates, risk-free rate is used by this model.
  • Absence of transaction costs and commissions- This model also assumes that there is no cost for transaction such as buying and selling as well as trade barriers are also absent.(Chorafas, 2007).
  • Liquidity- This model assumes perfect liquidity in the market. Beside this, there is possibility to sell or purchase any amount of options or stock at any given time.
  • Log normally distributed returns- One of the assumptions underlies through this model is that, returns on the stock which are underlying can be distributed normally. It is one of the reasonable assumptions in the real world.
  • No dividends- One of the other assumptions underlies with this model are that the stock which is underlain does not pay dividends for the duration of the life of option.
 


Constraints- Each and every model possess some restrictions or limitations. Some of the constraints which are associated with this model and might be constraint for the undertaken project are-

  • Less information- One of the constraints associated with the option model is that, information cannot be assessed easily.
  • Complicated- This project can be said as beginner as it is a new project; and options cause difficulties to the beginners. In earlier phase of the projects, it seems to be easy but later it is identified that the investors as well as the beginners cannot understand the activities well.(Chorafas, 2007).
  • Time decay- At the time of purchasing the option, option`s time value get lessen and for this rule there is no exception.
  • Unavailability of option for all stocks- One of the major constraints by using this model is that options are not available for each stock; it is only available for superior number of stocks.
  • Lower liquidity- volume of individual stock is not much. This constraint can affect the undertaken project`s success as the liquidity of the option stock would have less volume which in turn will deliver lower liquidity.

Interest rates- Option pricing model is suitable for the undertaken project. In this pricing model, interest rates are assumed to be stable; this factor will deliver super benefits to the undertaken project. Fluctuations in economy would not be able to affect the rates of interest in the undertaken project in future. This will create a risk- free environment for the undertaken project.

Risks- It is important to assess all the risks associated with the undertaken project. As the risk in the project can disturb all the activities carried forward to execute the project and this in turn can affect the business activities, profitability and productivity. Identifying risk would be helpful for the project in term of getting the success of project which is undertaken. Evaluating all the risk factors and working upon them so as to reduce these risk factors will ensure to provide a proper set of support to the company (Chang, 2011). It is required that risk should be analysed and the strategies should be developed which could help in reducing or minimizing the risk factors with the effect of which company could sustain in an appropriate manner.

Risk associated with the project is not high as the model used for the undertaken project delivers risk free environment as the interest rates are assumed to be stable. To mitigate risk associated with the less information; more and more information about the option would be assessed.

Inflation- Rise in the price of option would not affect the undertaken project as the stability of interest rates would not affect stock. Inflation can affect the amount of options which have higher liquidity.

 

Project Life- Estimated project life would be up to Five years.

Cash inflow and Outflow -Managing cash inflow and outflow is another important aspect that need to be considered in respect with this undertaken project. It is required that the organizations indulged in this project so it should have the eye on all the cash inflows and outflows (Movahedian Attar, et. al., 2013). It is required that the organizations should have proper set of knowledge about what they are purchasing and what they are selling, in what quantity organization is purchasing the projects and services and in what quantity the sale is being done. Company will only be able to ensure that its project is being successfully developed when its cash inflow will be more than the cash outflow because it will help the company to grow stringer in the market and to ensure that it could work on various other projects so as to sustain and ensure the success of the project.(Byoun, Kim, & Yoo, 2013)

Cash inflow and outflow of an organization

The cash flow statement is used to calculate the cash inflow and outflow of an undertaken project. That means it summarize the cash receipts (where cash comes from) and cash paid (where cash has gone). This makes the balance between the income statement and balance sheet. As it is analysed that this statement is made up from the three categories:(Cadle, & Yeates, 2008)

  • Operating statement
  • Investing statement
  • Financial statement
 

Economic analysis

Operating statement – These statement is to be made on daily basis as it includes inventory purchases, selling products, wages that needs to be paid, operating expenses that are to be paid. This section is linked with the current liabilities and current assets. As it is shown in the above statement the net cash flow operating activity of the undertaken project is calculated as 147900.

Investing activities –Investing activities includes the cash receipts that are occurred from selling the equipment and property, collecting loans, selling of investment securities. It also includes the cash paid to purchasing property, payment of loan, purchasing of investment securities, etc. and as given in the statement the current cash flow that is generating for the undertaken project is to be calculated as 41400.

Financial activity – Financial activity includes cash receipts from stock issuance, borrowing, etc. and cash paid to stock repurchase, loans repayment, dividends etc. and it is analysed that net cash flow from financing activities for an undertaken project is to be calculated as 87000.

At last 19500 will be the revenue of the undertaken project which is shown as net increase in cash in the above cash flow statement.(Phillips, & Phillips, 2010).

Conclusion - On the basis of above cash flow statement, it is analysed that the undertaken project will be beneficial as it shows the net increment into the cash which is 19500 and that will be the generated revenue of this project. This project is suitable to implement as it is described above that the financial model which will be applied in this project will be best as interest rate cannot affect option pricing model because in this model interest rate is stable and does not fluctuate with the continuous movement of the market. So, this project can deliver benefit to the company so this this can be executed.(Yang, 2013).

Conclusion

With the help of the report developed it could be concluded that the organisations in present scenario should indulge in the market and competitive analysis aspects so as to gather appropriate set of information related with the project. Gaining appropriate set of information related with the financial analysis and various risk factors attached with the project will help the company to sustain in the market and will help in providing proper set of support to the company. In this undertaken project option pricing model will be used by which company can get maximum benefit as there is no possibility of risks as interest rate is stable in this model.

 It is required that the companies should work on the path of success and sustainability as it will help the company in developing various new and effective set of strategies with the help of which company will be able to complete all the project with quality and within the deadlines which are planned by it. Completion of one project helps the company in getting another with the help of which it could attain competitive advantage and could earn better amount.

 

References

Byoun, S., Kim, J., & Yoo, S. (2013). Risk Management with Leverage: Evidence from Project Finance. Journal Of Financial And Quantitative Analysis, 1-65.

Cadle, J., & Yeates, D. (2008). Project management for information systems. Harlow, England: Financial Times/Prentice Hall.

Chang, Y. (2011). Does RFID improve firms’ financial performance? an empirical analysis. Information Technology And Management, 12(3), 273-285.

Chorafas, D. (2007). Risk management technology in financial services. Burlington, MA: Butterworth-Heinemann.

Fewings, P. (2013). Construction project management. 1st ed. New York: Spon Press/Routledge.

James, P. (2014). Project Financial Management and Modern Financial Slavery: The Case of a KSA Metro Project Start-up. Asian Journal Of Finance & Accounting, 6(2), 278.

Laumen, M., Kaufmann, T., Timms, D., Schlanstein, P., Jansen, S., & Gregory, S. et al. (2010). Flow Analysis of Ventricular Assist Device Inflow and Outflow Cannula Positioning Using a Naturally Shaped Ventricle and Aortic Branch. Artificial Organs, 34(10), 798-806.

Movahedian Attar, A., Khanzadi, M., Dabirian, S. and Kalhor, E. (2013). Forecasting contractor's deviation from the client objectives in prequalification model using support vector regression. International Journal of Project Management, 31(6), pp.924-936.

Pandey, D. (2008). Rural project management. New Delhi: New Age International (P) Ltd., Publishers.

Phillips, J. and Phillips, P. (2010). The power of objectives: Moving beyond learning objectives. Performance Improvement, 49(6), pp.17-24.

Velez-Pareja, I. (2012). Financial Analysis and Control - Financial Ratio Analysis (Slides). SSRN Electronic Journal, 28(1), 123-124.

Yang, L. (2013). Key practices, manufacturing capability and attainment of manufacturing goals: The perspective of project/engineer-to-order manufacturing. International Journal of Project Management, 31(1), pp.109-125.

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