Managing financial resources and development editing Essay

Managing financial resources and development editing - Essay Example The company can also increase or improve on its sales so that however much the payments are, the receipts will still be more in order to for the company to meet its current liabilities Net Present Value is the difference between the present value of the cash inflows and the present value of the net outflows. Project cash flows are discounted using an appropriate rate, which is the minimum rate of return required by the investor. In the case of these two projects; Alpha and Beta projects, the discounting rate is 10% which is used to calculate the discounting factors with the formula 1/(1 + r)n where r is the discounting rate and n is the number of years. The appropriate cash flows are the after tax cash flows, therefore the net cash flows should be estimated on the after tax basis. However, in these projects, there was no tax involved and no project had a residual value after the completion period of 5 years. Computation of cash flows requires a special treatment of non-cash expenses such as depreciation though in these projects, there is no depreciation considered. However, in case of depreciation, it has an indirect effect on the cash flow since it is a tax deduc tion expense. The general criteria for Net Present Value is that the project with a negative net present value should be undertaken since it increases the wealth of the shareholders and a project with a negative net present value should not be undertaken since it reduces the wealth of the shareholders. In a case where the manager is faced with several projects and would like to choose one to implement, then the net present values of all the projects will be calculated and compared. The project with the highest net present value should be preferred to the others with low net present value. Considering these two projects: the project Alpha and project Beta, both the projects will last for 5 years and will have a discounting rate of