Financial Managment worksheet 2 Essay Example | Topics and Well Written Essays - 1250 words

Financial Managment worksheet 2 - Essay Example Then the financial analysis should also incorporate the effect of finishing project A (in 5 years) and starting project C (and continuing it for 2 years) while making the decision between project A and B. If your organization grew by 10% - identify the incremental costs you would incur. What if your organization grew by 100% How/why would the costs differ Discuss this concept in relation to accounting and economic factors. The incremental cost would increase in the same proportion (10%) for some time. This is because the existing fixed cost will not change till the entire existing capacity is exhausted. Up to this stage, there will be a direct relationship between organization growth and increase in incremental costs. However, once the existing capacity is exhausted and there is a need to obtain additional equipment, plant, etc., then the fixed cost will increase as well. In this case, the relationship between incremental cost and organization growth will no longer be 1:1. From economic standpoint, the relationship between incremental cost and organization growth may not be direct even for small growth (10%). This is because there may be other economic factors to consider, for example, potential projects that may have to be let go due to organization growth in one business line. Yes, EVA has an impact on capital budgeting decisions. ... From economic standpoint, the relationship between incremental cost and organization growth may not be direct even for small growth (10%). This is because there may be other economic factors to consider, for example, potential projects that may have to be let go due to organization growth in one business line. Do EVA considerations impact capital budgeting decisions How could a company incorporate the idea of EVA into their capital budgeting decision process Yes, EVA has an impact on capital budgeting decisions. EVA is a method to calculate true economic income of an organization, and should be employed by management in making capital budgeting decisions. Since EVA is the net income of the organization adjusted after incorporating opportunity cost of the invested capital; so the capital that will be used to finance a particular budget should be able to generate enough income to meet EVA and not just financial net profits. EVA = Net income - Capital charge (cost of capital x invested capital) CASE STUDY Introduction This paper consists of financial analysis of two projects in order to select the project which will benefit the company the most. The financial calculations are provided in Appendix 'A' of the paper. The details of the projects are provided below: Project 1 Project 2 Cost $800,000 $650,000 Useful Life 10 years 8 years Salvage Value None None Incremental Sales $500,000 $375,000 Cost of Goods Sold 49% of sales 43% Advertising $50,000 10% of sales Depreciation Straight-line Straight-line Tax rate 40% 40% Discount rate 10% 10% The underlying assumption is that the two projects are equally risky. Recommendation The results of financial analysis reveal that Project 1 is better of the two