BFA107 FINANCIAL MANAGEMENT
In the business decision making, the role of the financial management skills is vital because it helps the manager to make the correct business decisions. This report is also aimed to develop the knowledge and understanding of the financial techniques that are helpful to make the decision for a project. In this way,
this report is important to increases the knowledge on the different kind of costs associated with the project. This report also provides the comments on the payback period and net present value.
Cost a kind of payment that is paid before and after it can be acquired. The process of the analysing and calculating the cost is called cost accounting. The cost accounting is conducted in each business that helps to management and owner to make the appropriate decision in the business.
It is also helpful to calculate the profit and determine the price of the business. As keeping the important in the decision making, costs are two types such as relevant cost and irrelevant cost:
Relevant cost plays a significant role in the decision making. It has ability to influences the decision in the business.
Due to this, manager and decision maker always evaluated the relevant cost before making any decision (Lin & Wu, 2011). In the reference of Tasmanian Motor Rental (TMR), it is found that relevant costs are land, maintenance cost, fixed overhead cost, insurance cost etc.
Beside of this, irrelevant cost does not affect the decision and it is less important. For Tasmanian Motor Rental (TMR), irrelevant cost will be Sunk cost, committed costs and small overheads.
How are possible cannibalization and opportunity costs considered in this analysis?
The business plan of Tasmanian Motor Rental (TMR) is effective because it bases on the rental service near the two different airports.
Opportunity cost refers to a kind of benefits that is missed by the business due to selection of another option. According to the project, Tasmanian Motor Rental (TMR) will start the business operation from the old cars.
Due to this, it will miss the benefits of the efficiency of the new car. Hence, the additional cost will be known as the opportunity cost for the project. At the same time, there is also possibility that company can also face the situation of cannibalization.
It is defined as a situation in which a company face the loss in selling of the existing product due to new product of the same company. However, it is also a success of the company regarding the new product. Hence, due to discount car rental service can influences the sales of the existing service of the company (Blum & Dacorogna, 2014).
Determine the initial investment cash flow
Initial investment cash flow is also known as the initial investment. The concept of the initial investment is associated with the investment for starting any project or business. It is also called initial cash outflow.
The initial cash flow is equal to working capital and capital expenditure. The process of the initial investment is also part of the strategic decision of the company.
A correct decision in the business regarding the initial investment helps the company to develop the value of the business and achieve the financial aim and objectives (Lin et al., 2015).
In the context of the case study of Tasmanian Motor Rental (TMR), it is found that the following will be the initial cash flow:
On the basis of the appendix 1, it is found that the initial investment cash flow is 2160000 for the business project of Tasmanian Motor Rental (TMR).
It includes the various items such as car purchasing amount, vehicle recovery system, land, annual maintenance cost, redevelop cost and renovate cost of building, marketing cost and networking capital (Modarres, 2016).
From the appendix 2, it is determined that in the three years out of the five years, the cash flow is negative. It shows that in these three years, the rental business is not able to earn the profit and cash inflow.
In this, it is found that a big part of the expenditure is associated with car purchasing, land, redevelopment of the building, marketing cost, administrative cost.
In this way, it is calculated the value of the cash outflow is more than cash inflow. Hence, it is the main reason that is why, the value of the cash flow is found negative in the first three years (Easton & Sommers, 2018).
Project payback is an analytic tool or technique that is helpful to make the decision on the business. In the simple meaning, payback period determines the time in which project cost will be covered. Following is the calculation for the project payback for rental business.
On the basis of the appendix 3, it is found that cash flow project is negative. Due to this, the project is unable to cover the cost in the project cycle. Hence, it is suggested that the project should not implement (Ogiela, 2015). Payback period shows that company will cover project cost in 410 years that it big time.
If this project will be sold out after five years in 1 million than it can cover some cost of the business that spent in business. In this, it is found that the project will have $2.8 million negative cash flow after five years. If, this project is sold out one million than it can cover some value of the negative cash flow.
In financial accounting, the net present value is the difference between the present value of the cash inflow and the present value of the cash outflow. This is a vital technique in financial management to make the decision for the investment in a project.
The calculation (appendix 4) of the net present value shows that the value of the result is in the negative ($25,46,270.65). Hence, it projects not profitable (El Kasmioui & Ceulemans, 2012).
As concerning the findings (Appendix 5) of net present value after applying the sensitive analysis and net present value, it is found that the value of the net present value of the project is still negative.
Hence, it is showing that the project is not profitable for TMR. It is because the project is unable to cover the initial investment.
As using the various decision-making techniques, it can be recommended that this project is not effective for TMR. It is because this project is providing a positive cash flow after the 5 years. Due to this, there is not the possibility to achieve the return from the project.
As concerning the result of the payback period, it is determined that there is no payback period in 5 years (Kara, 2012). The net present value of the project also shows that ($25,46,270.65) has a negative value in the future.
At the same time, the situation is also worst when sales decline 10% in the sensitivity analysis. Overall, it can be suggested that this project is not profitable for TMR so that it should avoid this.
On the basis above discussion, it can be said that the project is not profitable. So that company should ignore this. It is because payback period and net present value method providing the negative result for project.
Blum, P., & Dacorogna, M. (2014). DFA‐Dynamic Financial Analysis. Wiley StatsRef: Statistics Reference Online.
Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.
El Kasmioui, O., & Ceulemans, R. (2012). Financial analysis of the cultivation of poplar and willow for bioenergy. Biomass and bioenergy, 43, 52-64.
Kara, E. (2012). Financial analysis in public sector accounting. An example of the EU, Greece and Turkey. Eur. J. Sci. Res, 69(1), 81-89.
Lin, C. C., Chiu, A. A., Huang, S. Y., & Yen, D. C. (2015). Detecting the financial statement fraud: The analysis of the differences between data mining techniques and experts’ judgments. Knowledge-Based Systems, 89, 459-470.
Lin, S. L., & Wu, S. J. (2011). Is grey relational analysis superior to the conventional techniques in predicting financial crisis?. Expert Systems with Applications, 38(5), 5119-5124.
Modarres, M. (2016). Risk analysis in engineering: techniques, tools, and trends. CRC press.
Ogiela, L. (2015). Intelligent techniques for secure financial management in cloud computing. Electronic commerce research and applications, 14(6), 456-464.
Appendix 1
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Revenue ($ ‘000) | 850000 | 10,50,000 | 11,00,000 | 12,50,000 | 12,50,000 |
| Car | 1500000 | ||||
| Vehicle Recovery System | 150000 | ||||
| Land | 90000 | 90000 | 90000 | 90000 | 90000 |
| Annual maintenance cost | 25000 | 25000 | 25000 | 25000 | 25000 |
| Redevelop and renovate the buildings | 215000 | ||||
| Marketing cost | 30000 | 30000 | 30000 | 30000 | 30000 |
| Networking capital | 150000 | ||||
| Operating cost | 85000 | 105000 | 110000 | 125000 | 125000 |
| Fixed cost | 180000 | 180000 | 180000 | 180000 | 180000 |
| Administrative | 6,60,000 | 6,60,000 | 6,60,000 | 6,60,000 | 6,60,000 |
| Total cost | 3085000 | 1090000 | 1095000 | 1110000 | 1110000 |
| Cost of capital | 370200 | 130800 | 131400 | 133200 | 133200 |
| Total cash outflow | 3455200 | 1220800 | 1226400 | 1243200 | 1243200 |
| Profit / loss | -2605200 | -170800 | -126400 | 6800 | 6800 |
| Tax | 0 | 0 | 0 | 1870 | 1870 |
| Cash flow | -2605200 | -170800 | -126400 | 4930 | 4930 |
Appendix 2
| Items | Quantity | Price | Total amount |
| Car | 100 | 15000 | 1500000 |
| Vehicle Recovery System | 100 | 1500 | 150000 |
| Land | 1 | 90,000 | 90000 |
| annual maintenance cost | 1 | 25000 | 25000 |
| redevelop and renovate the buildings | 1 | 215000 | 215000 |
| Marketing cost | 1 | 30,000 | 30000 |
| Networking capital | 1 | 1,50,000 | 150000 |
| Total | 2160000 |
Appendix 3
| Cash flow | CCF | ||
| $20,10,000 | Payback period | ||
| -2605200 | ($26,05,200) | Initial investment | $20,10,000 |
| -170800 | ($27,76,000) | Uncovered | $20,10,000 |
| -126400 | ($29,02,400) | Cash flow during the year | $4,930 |
| 4930 | ($28,97,470) | Year before full recovery | 3 |
| 4930 | ($28,92,540) | Payback period New Machine | 410.708 |
| Years | 410 years | ||
Appendix 4
| Net present value | |||||
| Year | Year 1 | Year 2 | Year 3 | ||
| Cash flow | -2605200 | -170800 | -126400 | 4930 | 4930 |
| Discount rate @ 12 | 0.892857143 | 0.797193878 | 0.711780248 | 0.635518078 | 0.567426856 |
| Preset cash flow | ($23,26,071.43) | ($1,36,160.71) | ($89,969.02) | $3,133.10 | $2,797.41 |
| Total present value | ($25,46,270.65) | ||||
Appendix 5
| Net present value | |||||
| Year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Cash flow | -2680680 | -264040 | -1005520 | -719345 | -719345 |
| Discount rate @ 12 | 0.892857143 | 0.797193878 | 0.711780248 | 0.635518078 | 0.567426856 |
| Preset cash flow | ($23,93,464.29) | ($2,10,491.07) | ($7,15,709.27) | ($4,57,156.75) | ($4,08,175.67) |
| Total present value | ($41,84,997.06) | ||||
