Management Decision Model and Financial Management

Question: Justify the role of financial management in case of different projects and different situations? Answer: Introduction Financial management is the backbone for every organizations and individuals. It can be inferred that there are several methods of financial management that helps an organization to measure and monitor their financial structure effectively. This assignment will throw light upon the multiple capital budgeting tools and its several advantages and disadvantages. Apart from this, the assignment will also evaluate the appropriateness of cash management system and calculation of income of the financial sector of the organization will be evaluated. Part 1: The total receipts or collections of the organization Normas Cat Food is given as 5 million. It is also given that the new system of the organization will minimize the total collection period by 2.5 days and total period of disbursement will be maximized by 0.5 days or half days. The total difference between cash between collection and disbursements is coming as $2million. The total number of days is coming as three days. Therefore, the amount of freed-up finds is coming to be as $6million * 360/3 = $720 million per year. In the given case, the number of days is taken to be 360 in the year. The total amount of earnings is coming to be as 8 percent of the amount of freed-up finds which is equal to $57.6 million. If the new system worth $80000 is installed, then the expected return can be expected as $57.6 million- 80000 = $5.68 million. This is mainly because the total amount of incomes and freed-up amount is expected to be more than the amount of costs of the new machine. Part 2 There are quite a few capital budgeting techniques that can measure the feasibility of the project effectively. These are in terms of IRR, Payback and Net present value. It can be further inferred all the given tools and techniques can infer different values and conclusions towards a given project. The conflicting situation may arise due to the size of the given project effectively. Before accepting the feasibility of the given project, the financial manager and financial analyst of the project is required to calculate all the techniques with reference to capital budgeting. To analyze and implement the correct decision of the project, it is important to know the merits and demerits of the given capita budgeting techniques. Advantages of NPV The biggest advantage of net present value is that it helps to interpret the future value of the given project. It is based on the time value of money concept and also helps to find the suitability and feasibility of the given project. It is a cost effective method and can be implement in a simple manner. Another merit of the given method is that future amount of the given cash flows of the organization can be interpreted with the help of this method. The risk of the project can also be estimated with the given project (Brigham Ehrhardt, 2014) Disadvantages of NPV The biggest disadvantage of the method of Net Present value is that this method of capital budgeting totally ignores the size of the given project. In case of mutual exclusive projects, this method of capital budgeting can interpret wrong justifications in comparison to other methods of capital budgeting like IRR and payback period. In addition to this, the total amount and rate of cost of capital is assumed in this method of capital budgeting. IRR: Merits and Demerits The merit of this tool of capital budgeting is that it helps to interpret the value of investment in comparison with the rate of return of the project. It takes into consideration about all cash flows, risks and total time value of money of the project. It also considers the rate of cost of capital of a given project. These are the biggest merit of this method of capital budgeting. In terms of demerits, in case of change of discounting rate of cash flows, the organization may not evaluate the feasibility of the project through this method of IRR. A given project may also have more than 1 rate of returns. Therefore, it is another demerit of the given tool of capital budgeting method. Payback period (Pros and Cons) The advantage of the method of payback period is that it is extremely easier to calculate and it also helps to measure the liquidity of any given project. In addition to this, the risks and variances of the project can also be measured with the help of tools and technique of payback period method of capital budgeting. This method totally ignores the value of the given project or percentage of increase or decrease of the given project. This is one of the demerits of the given tool of capital budgeting. This method totally nullifies the measurement of time value of money and only takes into account about the period in which the total capital will be incurred with the given period of time. These are biggest disadvantage of this tool (Brigham Houston, 2004) From the above analysis, it can be deduced that since the results and interpretation of NPV is opposing and conflicting with the analysis of IRR and payback period, the projects can be considered as mutual exclusive projects. Net present value do not considers the size of any given project. In the given case, the project of the large corporation can be considered as huge and it is ignored by NPV. Therefore, the financial analyst of the project is required to accept the project as per the capital budgeting tools of IRR and payback period. Conclusion From the above analysis, the role of financial management in case of different projects and different situations has been justified. All the techniques of capital budgeting and financial management have been interpreted effectively. References Brigham, E., Ehrhardt, M. (2014). Financial management. Mason, Ohio: South-Western. Brigham, E., Houston, J. (2004). Fundamentals of financial management. Mason, Ohio: Thomson/South-Western.