FIN 370 Paper Assignment

FIN 370 Paper Assignment

Subject: Business    / Finance
Question
Word count is considered when determining if your post is substantive. To earn credit you
have to provide your own thoughts as well to topics you are discussing and your posts at a
minimum should have 50 words or more.
1.Companies use several criteria to determine if an investment is beneficial for their company. Some
of the ways they do this is to determine the Net Present Value and the Internal Rate of Return. How
are these computed? 2.A sunken cost is a cost that has already been incurred and cannot be recovered. In other words a
firm has to pay the cost regardless of the situation. Because of this the Sunk costs are excluded
from future business decisions, because the cost is irrelevant to the future decision. There are
several costs that can be considered sunk costs, some of which include product research such as
focus groups or specialty equipment that the company uses for their exclusive product.
Another type of cost is the opportunity costs, what is the definition and example of these types of
cost? 3. Just as Samia stated net working capital is defined as the difference in current assets and current
liabilities. The greater the firm’s use of current liabilities, other things being the same, the less will be
the firm’s liquidity. Some of the advantages associated with the use of current liabilities for financing
the firm’s asset investments include flexibility to use current liabilities to match the timing of a firm’s
short term financing needs, and interest costs on short term debt is lower than on long- term. What
are some of the disadvantages of the use of these short-term debts? 4. For a companies success planning is key at both the strategic and financial mangers level.
Strategically the company focuses on the management of the company, development of products,
expansion of current market and new markets. Financially planning will help the company meet
financial objectives of the company. How is this done? This is done with different analyses, one of
which is the break-even analysis.
Class, how is the break-even analysis used? What are its limitations, if any? Does anyone
have experience with this? 5. As you stated there are some issues with the Payback period, but there are also some reasons
why a company would choose to use it. Our text states "Despite its shortcomings, the payback
period rule is often used by large and sophisticated companies when they are making relatively
minor decisions. There are several reasons for this. The primary reason is that many decisions
simply do not warrant detailed analysis because the cost of the analysis would exceed the possible
loss from a mistake. As a practical matter, it can be said that an investment that pays back rapidly
and has benefits extending beyond the cutoff period probably has a positive NPV."
To solve for payback period the formula is fairly simplePayback Period = A + B
C In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A
Class any thoughts? Do you all feel you are comfortable in solving for payback? 6. What are the differences in the calculation of net present value and internal rate of
return? 7. How are investments in net working capital used in the preparation of a firm’s net cash
flow? 8. What are the relevant incremental cash flows for project evaluation?