Strategic financial management is highly concerned with the development and implementation of competent policies that aid in the growth aspect of firm. Moreover, finance is one of the crucial elements which have high level of impact on the smooth functioning of business organization. In this, by framing sound financial strategies company can make contribution in the attainment of goals. The present report is based on the case situation which entails that owner of plywood such as Jack Jones is planning to expand business operations and functions. In this context, report will shed light on the model of machinery in which business unit needs to invest money.
1. Calculating payback, NOPV, IRR, ARR, IRR and PI
3. Defining the efforts made by Jack to forecast cash flow
Cash flows such as inflow and outflow are important term to assess viability of the project among two or more mutually exclusive projects (Hladchenko, 2015). In the present case there are two project Nakata and Dakata which have initial cash flows £750,000 and £1300000. In order to determine cash flows of both the projects Jack Jones made various efforts and take helps. Jack Jones hire experts who are specialized in the capital budgeting for forecast cash flows of the project. He hires more number of experts and give them wages for estimate that which project will be beneficial.
In accordance with the financial theory and concepts forecast which is made by the company must be in accordance with the current trend or pattern. Financial theories entail that manager of the firm needs to make assessment of cash flow in accordance with the output produced by the similar kind of machines. In addition to this, plywood business organization needs to assess cash inflow and outflow by identifying the each possible alternative way of performing activities and functions.
Results of post-audit shows that predicted cash flow is lower than the actual cash flow generated by North’s executives. Hence, such results are not surprising because when actual cash flow is greater than predicted value then it indicates that results are biased (Kim and et.al., 2014.). The rationale behind this, overvaluation of results sometime may result into the loss. Moreover, due to the indication of high profit margin there is the possibility that business unit will forgo the potential gain that is associated with other alternative options.
5. Stating the deficiencies that are involved in the capital budgeting process of Jack’s
Capital budgeting process plays a significant role in the company which helps to management for undertake a particular project from two or more mutually exclusive project. In the present case the owner and CEO of north woods limited Jack Jones use majorly two budgeting techniques such as payback period and average rate of return (Yang, Narayanan and De Carolis, 2014). Deficiencies of both the methods are there in the business of Jack's by which he is unable to take appropriate decisions for expansion of business. Main lack of the payback period is that, it considers only time factor and not involve discounting factor and depreciation as well. Due to considering only duration of project it not provides accurate informations to the company. Another method is average rate of return which consider discounting factor and initial investment but not consider time factor. It gives average return of the overall project by which manager is unable to make effective business decisions. Another drawback is that it hires more number of experts who give different opinions by which decisions maker get confused for making decision.
6. Giving recommendation to Jack in relation to buying of machine
By taking into consideration all the above mentioned aspects it can be said that owner of plywood needs to place emphasis on making selection of Dakata machine. Moreover, NPV of Nakata is higher than Dakata to the large extent. NPV of Dakata is £523245 which shows that business unit will enjoy high level of return after the specified time frame. On the other hand, according to the selection criteria ARR, IRR, payback period and profitability index of Nataka is high. Thus, model of Nataka machine will prove be more beneficial for the firm.
7. Suggesting Jack in relation to making improvement in capital budgeting process
The owner use two methods payback and average rate as well as he hires more experts by which he is unable to get effective and appropriate decisions in order to select a project. It can be recommended to the Jack for improving its capital budgeting process is that, it should hire only one or two experts by which he will not confuse (Wolfe and Castroviovanni, 2014). Apart from this it should use net present value method which involves time value and discounting factor as well. NPV shows future value of initial investment after completion of the project, so he will be able to undertake a project from Nakata and Dakata (Yu, Ramanathan and Nath, 2014). Moreover, he requires using internal rate of return which indicate that after completion of the project how much return will be generate. Hence, it can be suggested to Jack that he should use NPV and IRR techniques for improving its capital budgeting process.
2.1 Critical review on current thinking of investment decision-making process
As per the view of Virlics A. (2013) each organisation needs to take business decisions and investment decisions as well to earn more profit. While making decisions with help of different types of capital budgeting techniques there are management get confused sometimes. When there are two or more mutually exclusive projects then the methods are give different values. For example: when management use IRR and NPV then from one method project A is better and from second method project B is beneficial, at that point company is unable to make appropriate decisions. Hence, it can be said that there are various issues with the methods in order to take decision for investment.
2.2 Development in business practice which identified by the research
From the research it can be interpreted that investment decisions process creates some issues for make investment. In order to this there are various development needs which helps to make appropriate investment decisions. In the business practices the management should develop the investment structure where it should consider another methods also rather than only capital budgeting techniques (Bates, 2014). The businesses require developing its investment strategies and use the portfolio as well which helps to make investment in different areas. When investor use various investment avenues that it able to generate more profit instead of investing in a particular area.
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In the future or upcoming financial year when the company use the investment appraisal techniques then able to assess viability of a project. In the future it requires using the advanced and updated technologies where excel sheet is to be improve. When management use updated technology then outcomes from the calculation will be get proper and help to the firm for make investment decisions effectively (Dudin and et.al., 2014). Appropriate investment decision leads to become more profitable and enhance financial performance of the business in the industry.
From the above report, it has been concluded that Jack Jones need to select Dataka which in turn helps company in enhancing the profitability aspect. Besides this, it can be inferred from the report that business unit needs to make selection of proposal by taking into consideration the time value of money concept. In addition to this, case situation entails that business entity has considered payback period for making selection of proposal. Thus, business unit needs to place emphasis of NPV while selecting the proposal.
Bates, J., 2014. The strategic importance of information policy for the contemporary neoliberal state: The case of Open Government Data in the United Kingdom. Government Information Quarterly. 31(3). pp. 388-395.
Cohen, S., Naoum, V. C. and Vlismas, O., 2014. Intellectual capital, strategy and financial crisis from a SMEs perspective. Journal of Intellectual Capital. 15(2). pp. 294-315.
Dudin, M. N. and et.al., 2014. The organization approaches peculiarities of an industrial enterprises financial management. Life Science Journal. 11(9). pp. 333-336.
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