21 Jun FINANCIAL MANAGEMENT
The Directors of M&R Plc wish to expand the Company’s operations.However; they are not prepared to borrow at the present time to finance capital investment. The Directors have therefore decided to use the company’s cash resources for the expansion programme.
Three possible investment opportunities have been identified. Only £600,000 is available in cash and Directors intend to limit the capital expenditure over the next 12months to this amount. The projects are not divisible and none of them can be postponed.
The following cash flows do not allow for inflation, which is expected to be 12% per annum constant for the foreseeable future.
Expected net cash flows (including residual values)
| INITIAL INVESTMENT | YEAR 1 | YEAR 2 | YEAR 3 | |
| PROJECT | £ | £ | £ | £ |
| A | -310,000 | 96,000 | 113,000 | 210,000 |
| B | -115,000 | 45,000 | 42,000 | 47,000 |
| C | -36,000 | -41,000 | -23,000 | 127,000 |
The company’s shareholders currently require a return of 16% nominal on their investment. Ignore taxation required.
a) Explain how inflation affects the rate of return required on an investment project and the distribution between a real and a nominal approach to the evaluation of an investment project under inflation.
(7 marks)
b) i.Calculate the expected net present value and profitability indexes of the three projects; and
ii. Comment on which project(s) should be chosen for the investment, assuming the company can invest surplus cash in the money market at 10%.
(15 marks)
c) Discuss whether the company’s decision not to borrow, thereby limiting investment expenditure, is in the best interests of its shareholders.
(8 marks)
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.