Corporate Finance

Decision Making Area 3:Investment Decisions * Table of Articles * Summary of Articles * Observations * Conclusion

In conclusion, capital investment decisions mostly involve choosing between one or more different projects. It is necessary that the individuals involved in making the

As financial manager, my role is a complex one covering many different areas of my clients finances. My role requires me to have a full understanding of the finances and how my company is ran. I am responsible for managing the budget and allocating funds amongst the different departments in relevance to importance, in order to keep the company running successfully. Choosing to invest in a company is a huge decision , requiring a rigorous amount of research. This research is done in order to determine whether the companies are a good fit for each other. The amount of research conducted can make the difference between my investor increasing their profit and losing money.

A. The company needs to focus on the free cash flows instead of the accounting profits since these are the funds flow the company will receive and will be able to reinvest. By examining the cash flows they will be adapt to predict the profits and/or expenses timetable. The company’s interests in these cash flows are on an after-tax basis since they are part of the shareholders dividends. Additionally, the additional cash flows are of important, because, after analyzing the project while viewing the company as a whole, the additional cash flows are seen as minimal benefits and will show the elevated value to the company if the decision is made to implement the project.

In making the investment decision, it would be imperative to form a strategic plan, therefore the financial investors, financial institutions, shareholders, and lenders would be able to visualize how the capital investment would be profitable for them as well as have a return on investment.

Our approach to valuing the processing plant can easily be decomposed into three distinct steps first, find the value of the foreseeable free cash flows. Next, calculate the terminal value of the project. Finally, take the present value of those flows. The next few paragraphs walk through each of these steps in order of progression.

3. What are the primary advantages and disadvantages of the prior approaches, DCF and Black-Scholes, that you took in valuing the rights? Please be specific about their assumptions. What further assistance or data would you require to refine your estimate of the right’s value?

First, calculating the project by using Net Present value method with normal condition ( it is expected running appropriately).

The two areas that will be focused on for the purpose of this analysis is based on a financial aspect and a

FIN 600 – Lecture 3 Discounted Cash Flow Valuation Chapter Outline Time Value of Money Valuation: The One-Period Case The Multiperiod Case Compounding Periods Simplifications What Is a Firm Worth? Time Value of Money    

INTRODUCTION ................................................................................................................................. 2 Return On Investment ................................................................................................................... 3 PART 1............................................................................................................................................... 4 Comparison among Payback, ARR and NPV.................................................................................... 4 PART

Every single investment requires decision making. The result of decision making without certain planning might not end well. One cannot simply make a decision by relying on his/her personal resources as the decision may give an impact to the investments. It is difficult to make decision which is related to the field of investments. Investors have to consider their risks, market condition, rate of return, and others in making their investment portfolio. However, there are many possible physiological biases that make investors become irrational thus making bad decisions for the investment.

United Metals has decided to launch the production of a new product, the firm is expecting this project to last over 8 years. The issue at hand is to know whether it would be more advantageous for United Metals to produce the components itself or to directly buy them from one of its suppliers, Amalgamated Components. In order to arbitrage between the “make” and “buy” decision we will calculate the Net Present Value of both these options. In order to do so we will first compute the annual cash flows that would result from one or the other option.

113 - 131). In details, by having the sensitive-adaptation characteristic in cost-identifying, the cost-based basis is claimed to be superior than the others in case the users have to evaluate the indirectly contributed or having the insignificant variability in the contractual cash-inflow assets and the settle-term-payment liabilities; Meanwhile, the current-market-price basis (the direct-contributed future cash-inflow assets) and the cash-flow-based (the unstated-term liabilities) shows their effectiveness in generating relevant information (ibid.) Indeed, these preliminary views are generally accepted by the most of the users (The Line Group, 2014; MU, 2014; HKAB, 2014). For the partial agreed users, in common, most concerns are raised over the cost occurs (NUS, 2014; Kingston Smith, 2014), the assumption of the market scenario in DP (HoTARAC, 2014; Imamura, 2014 - and later be viewed in the over-simplified issue that mentioned by the disagreed users), and the lack of options in case specific information is needed (ESMA, 2014; HoTARAC, 2014). In specifics, the effectiveness of the cost-based technique is questioned by both HoTARAC and Imamura by giving an example of changing in market scenario as there appears a reliable market price for the same type of mentioned assets (HoTARAC) or pointing out the unrealistic assumption such as cash flow will not occur for many years in paragraph 6.85 of DP

Under non-ideal conditions, it may be difficult to write down a complete set of states of nature and associated cash flows. Even if these can be written down, difficulties remain because objective state probabilities are not available. This is perhaps the most fundamental difficulty, since these probabilities must be subjectively estimated. Also an interest rate is not necessarily given. All of these difficulties lead to reliability problems of lack of representational faithfulness and possible bias. The expected present value calculation can still be made, but it is an estimate because the probabilities and other values that go into it are estimates.