Financial Institutions Investments And Management: A Study Essay.

Problem Statement

Discuss about the Financial Institutions Investments and Management.

Businesses faces many Uncertainties in their operating environments which present challenges to the management. These risks may be viewed from geographic, economic, social, and political perspectives (Mayo, 2017). Competition being a threat to existing business, firm endeavor to be innovative, efficient, responsible and forward thinking to increase their market shares. Management of firms Organizations therefore, are faced with continual challenge to seek out and evaluate capital decisions that will provide current profits and long-term growth. Managers make decisions that they hope will improve the company’s future success.

The product line selected by a company should be influenced by organizational goals. The major aim of a firm is to expand in sales, reduce costs of productions and increasing profits maximizations. Financial theory emphasizes that the goal of a business should be to maximize the shareholders wealth through improvement of the value of the firm. To achieve this, increasing it requires the firm to consider analyzing its operational activities both in the short-term and long-term to determines its profits. Every capital decision should increase the company’s attractiveness

among current investors and potential future investors. (Bensley, 2011)

Happy land is operating in a competitive business environment. The management decided to evaluate one of the product line’ clothes’ to determine if the project is feasible to the business survival. Every investment in a corporate business must be worthwhile to generate repetitive cashflows in the foreseeable future. The initial investment in the clothes production department includes, Market study expenses, Development of prototype and manufacturing equipment. Capital projects requires high initial capital investments that firm sometimes find it hard to source out these finances. Therefore, Financing the capital project is a duty for the management to consider. There are many uncertainties and risk associated acquisition of new financing strategies for the business. These, uncertainties can range from inflation and lower consumer spending to new government regulations and natural disasters.  Therefore, this necessitates analysis a valid analysis for the cash inflows and outflows for the clothes product line at happy land company to assess its viability. Therefore, it is necessary to evaluate the clothes product segment for happy land company to assess it contributions to the entire value of the business.

This study will adopt a descriptive survey design. A descriptive study is concerned with determining the frequency with which something occurs or the relationship between variables. The total target population is all the projected cashflows of clothes product line. 

Research methodology

A census will be used to collect the data. This is appropriate because the target population is small and every member of the population can be selected. The study will collect secondary data. The data will be extracted from the financial statement. The data secondary data will be edited, analyzed using Microsoft Excel for data analysis.

Happy land will take 2.14 years to recoup its initial investment in the clothes production line. Considering the five years useful life of the project, this pay-back period is economical and desirable for the business though the risk factor has not been incorporated. 

The project required rate of return is 12% while the internal rate of return is 19.75%. This means that the project will generate much greater returns since 19.75%>12%. Internal rate of return for a viable project should be more than the required rate of return because it doesn’t involve external factors such as inflation.

The project has 1.65 profitability index. This means the company should consider the clothes product line as viable to the entire business. A profitability index of more than 1is recommended.

The projects yield a positive NPV. This means that the value of the project is positive and can maximize the shareholders wealth. This is desirable for the management of happy land and they should consider the clothes product line as viable and even expand their production line.

The NPV approach using discounted cash flow model is expected to ascertain the contribution of the project to the overall value of the firm (ACCA, 2007).This ascertain whether the project to be undertaken adds value to the firm and if it is indeed worthwhile investing. As in the analyses of this firm clothes production line increases the value of the firm due to higher positive NPV. The decision criteria is when NPV is greater than zero, it adds value to the firm.

There is high sensitivity between prices and NPV. The obtained sensitivity graph shows that any change in price backwards leads to a negative NPV which is not desirable to the project team managers. Therefore, the clothes production line is sensitive to changes in the pricing systems may be due to competition from other firms or customers preference. (M. Kannadhasan, 2010). Increases in prices leads to a positive NPV but we can’t ascertain if the firm is maximizing on profits. Therefore, we recommend a set price for clothes or switch to other product with less volatility of pricing changes to NPV.

Analytical Findings

The quantity change of clothes sold is less sensitive to NPV. Therefore, based on quantity the firm can either increase or reduce the production at a certain limit but does not affect the overall returns of the company. (J, 2008). The higher the quantity sold the More positive NPV meaning that the firm can capitalize on economies of scale.

Analyzing the various results from the different capital budgeting techniques, the firm should invest in the project. With the NPV approach, a present value is given to the expected costs of the project and the expected benefits. This ascertain whether the project to be undertaken adds value to the firm. As in the analyses of this firm clothes production line increases the value of the firm due to higher positive NPV. The decision criteria is when NPV is greater than zero, it  adds value to the firm. (P.K. Jain, 2013)

Internal rate of return (IRR) approach reveals a higher rate of return as compared to the cost of capital rate, that is, the required rate of return. (Brigham, 2012). The Clothes production line has a higher rate of return as compared to the firms cost of capital, therefore, it should be undertaken. It has met the risk incorporated discounting of cashflows and non-discounting techniques. Therefore, the firm may seek to expand its operations, purchase other plants and machinery.

The findings of the evaluations of the project is found to be feasible in all the methods of capital budgeting. This report therefore recommends the following; 1. Improve on customer service and delivery 2. Reduce the cost of production by applying modern technological methods 3. Pricing of clothes be standardized 4. Carry out SWOT analysis and implement the changes 5. Seek for mergers, partnership and alliances to improve production.

Happy land management and the board of directors to form a committee to oversee the suggested solutions to the current crisis. Furthermore, the management should assign each the operational manager, finance managers and the human resource manager to oversee the implementations of the recommended solutions.

The firm to Implement projects which satisfy the company’s criteria for deciding whether the project will earn a satisfactory return on investment. Monitoring the performance of investment projects to ensure that they perform in line with expectations. Having considered clothes production line, there is a need to evaluate the other projects (products lines) in order to determine the best project that meets the expected returns.

Clothes production segment Appraisal techniques

A sound financial system must be installed by the financial department that monitors the cash flows from the cost centers and the respective revenue centers. (M. Kannadhasan, 2010). This will enable a periodically sensitivity analysis program, that is, if the project is undertaken, sensitive items of cash flow should be closely monitored and action taken if they vary from plan. If a project NPV is particularly sensitive to an item of cost or revenue, management might decide to reject the project because of the investment risk involved.

Conclusions

The biggest challenge in today’s investment is to allocate the scarce resources (finances) to competing projects. The management decisions therefore is vital in business investment by use of capital budgeting techniques. Capital projects requires a high initial investment capital which may be costly to the firm, therefore, a to ensure cash flows in the future, there is a need to ensure an accurate capital budgeting technique. This analysis employed several capital techniques and highlighted the following:

Sensitivity analysis is useful because it directs management attention to the critical variables in the project. These are the variables where a variation in the cash flows by a fairly small amount and certainly by an amount that might reasonably be expected, given uncertainty about the cash flows would make the NPV negative and the project not financially viable.

The purpose of sensitivity analysis is to assess how the NPV of the project might be affected if cash flow estimates are worse than expected. The management of this firm must endeavor to pay closer attention to this prediction model of the future performance of the product line. This is more important since the business operates in uncertain environment which affects the running of the business. Sensitivity analysis can be used to calculate the percentage amount by which benefits must fall below estimate or costs rise above estimate

before the project NPV becomes negative. This is a guidance to the firm since fluctuations in sales volume, fluctuations in quantity sold affects the returns from the business.

References

ACCA, 2007. Financial Management F9 Text. London: Emile Woolf International Publishing.

Bensley, b., 2011. CFIN. Australia: south-western, Cengage learning.

Brigham Eugene F, J. F., 2009. Fundamentals of financial Management. 12th ed. Canada: Cengage Learning.

Brigham, H., 2012. Financial management. 2nd ed. Australia: Cengage learning.

Irala, L. R., 2007. Financial Management Practices in India. SSRN.

J, M., 2008. Financial Management: An introduction. s.l.:Routledge.

2010. Kannadhasan, N., 2010. Capital Budgeting in Corporate sector. Journal of finance, 130(2), pp. 12-16.

Mayo, H. B., 2017. Basic Finance: An Introduction to Financial Institutions, Investments, and Management. 12th Edition ed. Houston: Chicago press.

P.K. Jain, S. S. S. S. Y., 2013. Financial Management Practices: An Empirical Study of Indian Corporates. India: Springer.

Timothy R. Mayes, T. M. S., 2016. Financial Analysis with Microsoft® Excel®. 8th Edition ed. s.l.:Cengage learning.