Corporate Finance

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Contents 1:0 TO IDENTIFY THE RELEVANT CASH FLOWS TO EVALUATE THE PRODUCTION OF THE NEW SECURITY RIGHT 1 1.1 OPORTUMNITY COST 1 1.2 CASH FLOWS VS PROFIT 2 1.3 WORKING CAPITAL 2 1.3 OVERHEARDS 2 1.4 SUNK COST 2 2.0 A REPORT ON THE RECOMMENDATION IF THE PROJECT IS ACCEPTED OR REJECTED 3 3.0 TO CALCULATE THE NET PRESENT VALUE OF THE NEW PRODUCT USING GLOW PLC 3 4.0 TO CALCULATE THE INTERNAL RATE OF RETURN 4 5.0 TO WRITE A REPORT ON THE ADVISABILITY OF ACCEPTING THE CONTRACT AND ANY ADDITIONAL FACTORS TO BE CONSIDERED 5 1:0 TO IDENTIFY THE RELEVANT CASH FLOWS TO EVALUATE THE PRODUCTION OF THE NEW SECURITY RIGHT For the financial managers to evaluate investment opportunities, they must first determine the relevant cash…show more content…
These variable cost must be taken into account 1.4 SUNK COST A sunk cost is a cost that an entity has incurred, and which it can no longer recover by any means. Sunk costs should not be considered when making the decision to continue investing in an ongoing project, since you cannot recover the cost. However, many managers continue investing in projects because of the sheer size of the amounts already invested in the past. They do not want to "lose the investment" by curtailing a project that is proving to not be profitable, so they continue pouring more cash into it. Rationally, they should consider earlier investments to be sunk costs, and therefore exclude them from consideration when deciding whether to continue with further investments. Like in this project, which the marketing consultants were hired to assess the demand for the product, that 250,000 should be ignored and it is a sunk cost in the fact that it has already been incurred and in the Net present value, we only consider the future incremental cash flow. 2.0 A REPORT ON THE RECOMMENDATION IF THE PROJECT IS ACCEPTED OR REJECTED REPORT NO: 7628W TO: SENIOR MANAGEMENT FROM: CONSULTANT DATE: 22/03/2016 RECOMMENDING THE PROJECT To make sensible investment decisions, a good financial analyst should use a method that considers all of the costs and benefits of each investment opportunity, and makes a logical allowance for the

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