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Discuss About The Management Practices That Sustain Values.

This report is associated to having an understanding of the small powerboats that are manufactured by PENTAG Company. The organization is in the lookout for manufacturing powerboats that would be eco-friendly and thereby would not pollute the environment. The director of the organization has explained that this is a niche market and better researches and developments would lead to better products. The company has undertaken additional investments with the help of which the companies are able to manufacture the new products and therefore additional plants and equipment are essential and accordingly extra cost for transportation are even required. The company is in the requirement of an initial stock in the investment and therefore the organization is planning to finance the project by issuing 10% debentures of $10 million and the rest of the finance needs to be attained with the help of equity. It has become essential for the organization to understand which of the projects should be undertaken and accordingly steps can be taken with the help of which the company can enhance their level of operations. The two projects that the company wants to undertake comprises of the Q-Powerboats and S-Powerboats and therefore a comparison of the two projects needs to be undertaken in order to have some idea about which project would be ideally suited for the company with respect to returns from investment. A detailed assessment of the cash flows has been essential in order to have an understanding of the capital budgeting processes that can be used in order to assess the projects.  

The findings that has been constructed is based on the results that have been attained from the evaluation of the cash flow statement and this result has been in accordance to the quantitative aspects and the qualitative aspects will be discussed on the tangible factors that the project can have on the several factors related to the project.

An excel sheet has been constructed with the help of which an understanding can be obtained with respect to which project is ideally suited for the organizations. Q-Powerboat has an initial investment of $21,500,000 as the cost of the plant has been seen to be $20,000,000 and the installation and the transportation cost is seen to be $800,000. The investment in stock has been $500,000 and the fund raised from the debtor has been $380,000. A cash flow statement has been constructed for Q-Powerboat for the next 6 years. The net operating cash flow that has been attained explains the fact that the profit has been $8,973,000 in the first year and accordingly the profit has been reducing in the next five years. The net operating cash flow that has been attained in the sixth year has been $5,823,000. The net salvage value that has been found for Q-Powerboat has been $2,800,000. The discounted rate that is provided for Q-Powerboat has been 20% and thereby a comparison can be made with the help of which discounted cumulative cash flow has been attained. The net cash flow that has been attained explains the fact that in the 1st year, the value has been $8,973,000 and thereafter the net cash flow has been declining, but the sixth year the net cash flow increased and the value came to $8,623,000. With the help of the cash flow statement, an understanding can be attained with respect to the Net Present Value, Internal Rate of Return, Payback Period and Discounted Payback Period. It is seen that Q-Powerboat has net present value of $4,276,443, the internal rate of return of Q-Powerboat has been 29.67%, the payback period has been 2.54 and the discounted payback period for the company has been 4.135.

Quantitative Issues

On the other hand, by considering the particulars of S-Powerboat, it is seen that the initial investment has been $21,500,000, out of which cost of the plant has been $20,000,000, installation and transportation cost is $800,000 and the investment in stock has been $500,000. The future cash flow that has been determined has been increasing every year and accordingly the future cash flow in the sixth year has been $11,100,000. The net cash flow that has been attained for S-Powerboat has been $ 6,400,000 and the value has increased to $11,100,000 in the sixth year. In this manner, the net present value for S-Powerboat has been $4,288,489 and the internal rate of return has been 28.42%. The payback period is 2.97 and the discounted payback period is 4.618. The results that have been discovered are similar to the results attained for Q-Powerboat and therefore both the projects can be recommended.   


It is seen that when the discount rate is increased from 20% to 25%, there are certain changes in the values of the cash flow statement of the two projects as well. The net cash flow value for Q-Powerboat and S-Powerboat has remained the same but the discounted cash flow has changed. The net present value for Q-Powerboat with a discount rate of 25% has a value of $1,794,528. The internal rate of return has been same and the value has been 29.67%. The payback period has been constant having a value of 2.54% and there has been a change in the discounted payback period as the time period has increased to 5.008 with respect to the earlier results.

In the same manner, the cash flow statement of S-Powerboat has changed as well with the changes in the discount rate and the results indicate that the net present value of S-Powerboat has declined massively as the net present value sums up to $1,504,466 whereas the internal rate of return and payback period has remained constant. The discounted payback period that has been for S-Powerboat has a value of 5.338.

The quantitative issues that have been discovered with respect to the two projects determines the fact that changes in the discount rate has an impact on the net present value for both the projects but S-Powerboat faces additional impacts with respect to Q-Powerboat. The net present value of S-Powerboat has a drastic fall with the changes in the discount rate and comparatively the fall in the net present value of Q-Powerboat has been lower. It is seen that discounted payback period for the two projects have changed as well and there has been a rise in the discounted payback period for both the companies. However, the increase in the discounted payback period has been higher for S-Powerboat. The key changes quantitative issues that have been identified is the changes in the net present value and the change in the discounted payback period.

Qualitative Issues

There are several qualitative issues that are associated with the two projects as well and it is seen that environmental effect has been one of the greatest concerns. The company has focused on maintaining environment balance and therefore has tried to manufacture products that would be eco-friendly. On the other hand, the fall in the net present value can hamper the company image and the market share of the organisation. Therefore, these are the risks and the issues that have been recognised with respect to the two projects and after extensive evaluation, it can be stated that S-Powerboat has more risks in comparison to Q-Powerboat as the extent of fall in the net present value with the rise in the discount rate has been more for S-Powerboat. On the other hand, the discounted payback period for S-Powerboat has increased as well in comparison to Q-Powerboat and thus Q-Powerboat is the project that is recommended for PENTAG.

The assessment of the qualitative and the quantitative issues has led to the discovery of results with respect to which the company can move ahead with a specified project. The quantitative issues have highlighted that S-Powerboat has seen a significant fall in their net present value in comparison to Q-Powerboat. The discounted payback period for S-Powerboat is even high in accordance to Q-Powerboat. By assessing the qualitative issues, it is seen that the market share and the company image would fall with the initiation of S-Powerboat and this project would hamper the environment as well because S-Powerboat has increased level of carbon emissions with respect to Q-Powerboat. Therefore, according to this justification, Q-Powerboat project should be undertaken by PENTAG in order to increase the level of sales and increase their level of profit by safeguarding the environment.

A detailed comparison has been undertaken and it is seen S-Powerboat has better net cash flow in comparison to Q-Powerboat. However, when the discount rate is applied and the discount rates are changed the net present value of S-Powerboat has been lower than the net present value of Q-Powerboat. On an overall assessment, it is seen that both the projects have similar characteristics but the implication of discount rate highlights that Q-Powerboat is better and therefore should be recommended. The cross over point for the two projects is 20.17%. Therefore, in an addition Q-Powerboat project is recommended to PENTAG.    

Conclusion

The report has therefore been able to address the issues faced by PENTAG with respect to the dilemma they had been facing with respect to the project that would be considered in order to expand their business. In this manner, the results that have been obtained has been able to address that Q-Powerboat is ideal for the company as it would be able to attain the objectives that is desired by the organization from this new project.    

References

Anthony, R. and Sabri, M.F., 2015. Financial Management Practices of Medical Practitioners in the Private and Public Medical Service in Malaysia. International Review of Management and Business Research, 4(4), p.1105.

Berry, D. and Kato, T., 2018. Introduction. In Employee Ownership and Employee Involvement at Work: Case Studies(pp. 1-6). Emerald Publishing Limited.

Bir, J.S., 2016. Knowledge, Attitude and their Effect on the Recently Graduated Employees’ Financial Management Practices and Satisfaction. Economic Literature, 12, pp.69-81.

Bloom, N., Sadun, R. and Van Reenen, J., 2015. Do private equity owned firms have better management practices?. American Economic Review, 105(5), pp.442-46.

Herzallah, A.M., Gutiérrez-Gutiérrez, L. and Munoz Rosas, J.F., 2014. Total quality management practices, competitive strategies and financial performance: the case of the Palestinian industrial SMEs. Total Quality Management & Business Excellence, 25(5-6), pp.635-649.

Hu, Q. and Kapucu, N., 2017. Can Management Practices Make a Difference? Nonprofit Organization Financial Performance during Times of Economic Stress. Journal of Economics and Financial Analysis, 1(2), pp.71-88.

Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A strategic management approach. Emerging Markets Journal, 5(1), p.26.

Martínez-Ferrero, J., Banerjee, S. and García-Sánchez, I.M., 2016. Corporate social responsibility as a strategic shield against costs of earnings management practices. Journal of Business Ethics, 133(2), pp.305-324.

Mwangi, E.K., Gakure, R.W., Arasa, R. and Waititu, A., 2017. Financial Management Practices Influence on Performance Contracting Results in Local Authorities in Kenya. European Journal of Business and Strategic Management, 2(4), pp.1-15.

Pfeffer, J., 2014. Business and the spirit: Management practices that sustain values. In Handbook of workplace spirituality and organizational performance (pp. 43-59). Routledge.

Rao, V.N., 2015. Financial management practices for empowerment of women's self help groups in micro finance--a study. Abhigyan, 33(1), pp.12-23.

Waweru, C. and Ngugi, K., 2014. Influence of financial management practices on the performance of micro and small enterprises in Kenya. European Journal of Business Management, 1(11), pp.141-161.

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