John Locke and Thomas Hobbes Essay - 1077 Words

John Locke and Thomas Hobbes both believe that men are equal in the state of nature, but their individual opinions about equality lead them to propose fundamentally different methods of proper civil governance. Locke argues that the correct form of civil government should be concerned with the common good of the people, and defend the citizenry’s rights to life, health, liberty, and personal possessions. Hobbes argues that the proper form of civil government must have an overarching ruler governing the people in order to avoid the state of war. I agree with Locke’s argument because it is necessary for a civil government to properly care for its citizens, which in turn prevents the state of war from occurring in society. Locke also has a†¦show more content†¦Hobbes states that the proper form of civil government must have a supreme ruler governing the people in order to avoid the state of war. He believes that the goal of the people is to escape the state of war , and that they are willing to transfer their rights in order to leave it. â€Å"Whensoever a man transfers his right, or renounces it; it is either in consideration of some right reciprocally transferred to himself; or for some other good he hopes for thereby. For it is a voluntary act: and of the voluntary acts of every man, the object is some good to himself.†3 He believes that all men are equal in the state of nature despite any preexisting differences between them because they are ultimately powerful enough to defend themselves and their resources. â€Å"Nature hath made men so equal, in the faculties of the body, and mind; so that though there be found one man sometime manifestly stronger in body, or of quicker mind than another; yetShow MoreRelatedJohn Locke And Thomas Hobbes886 Words   |  4 Pagesdiscuss the differences in political theories expressed by both John Locke and Thomas Hobbes. In, Leviathan, by Thomas Hobbes, and in, The Second Treatise of Government, by John Locke different theories of political legitimacy and definitions of the state of nature are described. The following paragraphs analyze multiple different points that are imperative to understanding these political theories. In the reading, Leviathan, Thomas Hobbes discusses what human existence is in the state of nature andRead MoreThomas Hobbes And John Locke911 Words   |  4 Pagessocial contract theory, Thomas Hobbes and John Locke established many of the founding ideals that contemporary Liberalism is based on. While the shared many similar positions, there are some key distinctions to be made between the arguments Hobbes and Locke make in Leviathan and Second Treatise of Civil Government, respectively. In this paper I will argue the differences between how each of them viewed the right of the subjects to revolt from the sovereign. Thomas Hobbes published his most famousRead MoreThomas Hobbes And John Locke Essay1441 Words   |  6 PagesEifling-Question 4 Hobbes and Locke During and after the English Revolution, a few philosophers expressed different views on their philosophical outlook and life experiences. Some of the most outstanding thinkers include Thomas Hobbes and John Locke. They had opposing views on governance matters, but the two, also, had striking similarities. In addition, the two represented an increasingly modernized European population that despised absolute kingship. Both Hobbes and Locke proposed a conceptionRead MoreJohn Locke And Thomas Hobbes1287 Words   |  6 Pagesknow how to balance and consider the nature of humankind and their rights. John Locke and Thomas Hobbes were both political philosophers who developed theories about how the government should work. They set up their theories around The Natural Law and the Social Contract Theory. Although John Locke and Thomas Hobbes had a similar goal, their beliefs and opinions were definitely not the same. John Locke and Thomas Hobbes both believed in the Natural Law and the Social Contract Theory. They both developedRead MoreThomas Hobbes And John Locke1346 Words   |  6 PagesContracts Thomas Hobbes and John Locke were two English political philosophers, who have had a lasting impact on modern political science. Thomas Hobbes and John Locke both spent much of their lives attempting to identify the best form of government. Locke and Hobbes were among the most prominent of theorists when it came to social contract and human rights. A Social Contract is an agreement among the members of a society to cooperate for social benefits. Thomas Hobbes and John Locke, are the twoRead MoreThomas Hobbes And John Locke928 Words   |  4 Pagesthere is no formed society, government, laws, safety, etc. both Thomas Hobbes and John Locke take this into perspective while introducing a political view. As illustrated by Thomas Hobbes, John Locke, Karl Marx, and Friedrich Engels, they proposed political views on how human nature can prosper. Initially, Thomas Hobbes introduces a concept on the state of nature and its effects as well as how peace can be achieved. In Leviathan, Hobbes defines what living in a state of nature would be like and theRead MoreThomas Hobbes And John Locke888 Words   |  4 Pagesare very similar but diverge in the moments that solidify their stance on their opinion. Thomas Hobbes and John Locke is both political scientist who have made strides in the area of social contracts and share being natural law theorist also. Locke and all other natural law theorists assumed that man was by nature a social animal and there fore struck contracts with each other to secure safety among them. Hobbes assumed differently, thus his verdicts are very different from other natural law theoristsRead MoreThomas Hobbes And John Locke1494 Words   |  6 Pages1) Thomas Hobbes and John Locke share the basic assumption that a theory based off of abstract individualism, consent, sovereignty and reason will produce a peaceful and productive society. This theory is the liberal political theory, which is the philosophy of individual rights and a limited government. Both Hobbes and Locke both center the majority of their ideas off of how people’s lives should be based off of nature rights instead of natural law. This being said, people are also subject to theRead MoreThomas Hobbes And John Locke1426 Words   |  6 PagesBy the second half of the 17th Century, England would experience one of the bloodiest conflicts in its history, ultimately serving to influence some of the most phenomenal political philosophers in Europe --Thomas Hobbes, and John Locke. England was in constant unrest, choosing new forms of government almost on a whim in desperate attempts to restore order in the Country. The English Civil War in 1642 etched a legacy of drea d in the people of England, and the war only appeared more disastrous andRead MoreThomas Hobbes And John Locke1659 Words   |  7 Pagesmajority. The following pages show how modern social contract theory especially that of Thomas Hobbes and John Locke, grew into the divisive issue it is in contemporary political philosophy. Modern social contract theory can trace its roots to prominent thinkers Thomas Hobbes and John Locke. It is their thoughts on social contracts that lie at the center of the many spheres we are a part of. For Hobbes and Locke, social contract theory sought to analyze the relationship between rulers and the ruled

Corporate Financial Management Lecturer’s Guide Free Essays

CFML_A01v3. QXD 8/6/08 3:51 PM Page 1 Lecturer’s Guide Corporate Financial Management Fourth edition Glen Arnold For further lecturer material please visit: www. pearsoned. We will write a custom essay sample on Corporate Financial Management Lecturer’s Guide or any similar topic only for you Order Now co. uk/arnold ISBN 978-0-273-71064-6  © Pearson Education Limited 2008 Lecturers adopting the main text are permitted to download and copy this guide as required. CFML_A01v3. QXD 8/6/08 3:51 PM Page 2 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies around the world Visit us on the World Wide Web at: www. pearsoned. co. uk ––––––––––––––––––––––––––––––––––– First published under the Financial Times Pitman Publishing imprint in 1998 Second edition published 2002 Third edition published 2005 Fourth edition published 2008  © Financial Times Professional Limited 1998  © Pearson Education Limited 2002, 2005, 2008 The right of Glen Arnold to be identified as author of this Work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. ISBN-978-0-273-71064-6 All rights reserved. Permission is hereby given for the material in this publication to be reproduced for OHP transparencies and student handouts, without express permission of the Publishers, for educational purposes only. In all other cases, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without either the prior written permission of the Publishers or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd. , Saffron House, 6-10 Kirby Street, London EC1N 8TS. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published, without the prior consent of the Publishers. CFML_A01v3. QXD 8/5/08 4:16 PM Page 3 CONTENTS Preface Location of answers to questions and problems SUPPLEMENTARY MATERIAL FOR CHAPTERS Chapter 1 The financial world Chapter 2 Project appraisal: Net present value and internal rate of return Chapter 3 Project appraisal: Cash flow and applications Chapter 4 The decision-making process for investment appraisal Chapter 5 Project appraisal: Capital rationing, taxation and inflation Chapter 6 Risk and project appraisal Chapter 7 Portfolio theory Chapter 8 The capital asset pricing model and multi-factor models Chapter 9 Stock markets Chapter 10 Raising equity capital Chapter 11 Long-term debt finance Chapter 12 Short-term and medium-term finance Chapter 13 Treasury and working capital management Chapter 14 Stock market efficiency Chapter 15 Value management Chapter 16 Strategy and value Chapter 17 Value-creation metrics Chapter 18 Entire firm value measurement Chapter 19 The cost of capital Chapter 20 Valuing shares Chapter 21 Capital structure Chapter 22 Dividend policy Chapter 23 Mergers Chapter 24 Derivatives Chapter 25 Managing exchange-rate risk  © Pearson Education Limited 2008 5 6 7 10 14 20 24 29 33 38 40 43 47 51 54 58 59 64 66 72 74 77 81 84 86 91 96 3 CFML_A01v3. QXD 8/5/08 4:16 PM Page 4 Supporting resources Visit www. pearsoned. co. uk/arnold to find valuable online resources Companion Website for students ? Learning objectives for each chapter ? Multiple-choice questions with instant feedback to help test your learning ? Weblinks to relevant, specific Internet resources to facilitate in-depth independent research ? A wide selection of FT articles, additional to those found in the book, to provide real-world examples of financial decision making in practice ? Interactive online flashcards that allow the reader to check definitions against the key terms during revision Searchable online glossary For instructors ? Complete, downloadable Instructor’s Manual including answers for all question material in the book ? A brand new set of over 800 PowerPoint slides that can be downloaded and used as OHTs Also: The regularly maintained Companion Website provides the following features: ? Search tool to help locate specific items of content ? E -mail results and profile tools to send results of quizzes to instructors ? Online help and support to assist with website usage and troubleshooting For more information please contact your local Pearson Education sales representative or visit www. earsoned. co. uk/arnold CFML_A01v3. QXD 8/5/08 4:16 PM Page 5 PREFACE This Guide is designed to assist lecturers and tutors using Corporate Financial Management fourth edition. Supplementary material for chapters For each chapter: †¢ The learning outcomes are outlined. †¢ Key points and concepts are listed. †¢ Solutions to selected numerical problems (those marked with an asterisk in the main book) are provided. Note that there is often more than one possible correct solution to a problem. Different answers, which nevertheless follow the logic of the argument presented in the text, may be acceptable. Overhead projector transparency masters Also available on the website in PowerPoint ® for downloading are over 800 selected figures, tables and key points reproduced in a form suitable for creating overhead projector transparency masters. These are arranged in the order in which they appear in Corporate Financial Management. The learning objectives and summary points from the chapters are also included. Glen Arnold  © Pearson Education Limited 2008 5 CFML_A01v3. QXD 8/5/08 4:16 PM Page 6 LOCATION OF ANSWERS TO QUESTIONS AND PROBLEMS (No answers given to those in final column) Chapter No Answered in Appendix VII Answered in Lecturer’s Guide 1 Essay answer required (see text) All (see note in Appendix VII) 2 1, 2, 4, 5, 6 3, 7 3 1, 2, 3, 6, 9, 11, 13, 15 4, 5, 7, 8, 10, 12, 14 4 1, 2, 4, 5 3 5 1, 2, 3, 5, 6, 9, 10 4, 7, 8 6 1, 4, 5, 6, 7, 8, 9, 10, 11 2, 3, 12 7 1, 2, 3, 7, 8, 9, 10, 11, 12, 13, 15 4, 5, 6, 14a, b, c 8 1, 3, 4, 5, 7, 8, 9, 10 6, 7, 8, 9 14d 2, 6, 11 9 1–11 10 12 8 1–7, 9–11, 13–19 11 1, 2, 3, 4, 5, 6, 10, 11, 13, 16 7 8, 9, 12, 14, 15, 17–20 12 1, 2, 4, 9, 10, 11 5, 12 3, 6, 7, 8, 13, 14, 15 13 1, 4, 5, 7, 9, 10 3a, 6, 8, 23, 25a , 3b, 11, 12, 13–22, 24, 25b, 25c 14 2 15 8, 9 1, 3–17 7, 10 16 1–6 1–4 17 1, 5, 6, 7 18 1, 2 19 2, 3 1 20 3, 4, 5, 6, 7, 9 8, 10 1, 2 21 2, 3, 6a, 9 1 4, 5, 6b, 7, 8 22 4, 5, 8 23 6 1, 3, 4, 5 2, 7, 8, 9 24 1, 2, 3, 4, 5, 7, 10 6, 8, 9 11, 12, 13 25 1, 2, 7, 8a, 10, 11 4, 9 3, 4b, 5, 6, 8b 6 2, 3, 4, 4a 8 1, 2, 3, 4, 7  © Pearson Education Lim ited 2008 CFML_CH01v3. QXD 29/7/08 17:25 Page 7 SUPPLEMENTARY MATERIAL FOR CHAPTERS Chapter 1 THE FINANCIAL WORLD L EARNING OUTCOMES It is no good learning mathematical techniques and theory if you lack an overview of what finance is about. At the end of this chapter the reader will have a balanced perspective on the purpose and value of the finance function, at both the corporate and national level. More specifically, the reader should be able to:  ¦ describe alternative views on the purpose of the business and show the importance to any organisation of clarity on this point;  ¦ describe the impact of the divorce of corporate ownership from day-to-day managerial control;  ¦ explain the role of the financial manager;  ¦ detail the value of financial intermediaries;  ¦ show an appreciation of the function of the major financial institutions and markets. K EY POINTS AND CONCEPTS Firms should clearly define the objective of the enterprise to provide a focus for decision making.  ¦ Sound financial management is necessary for the achievement of all stakeholder goals.  ¦ Some stakeholders will have their returns satisfied – given just enough to make their contribution. One (or more) group(s) will have the ir returns maximised – given any surplus after all others have been satisfied.  ¦ The assumed objective of the firm for finance is to maximise shareholder wealth. Reasons: – practical, a single objective leads to clearer decisions; – the contractual theory; – survival in a competitive world; it is better for society; – counters the tendency of managers to pursue goals for their own benefit; – they own the firm.  ¦ Maximising shareholder wealth is maximising purchasing power or maximising the flow of discounted cash flow to shareholders over a long time horizon.  ¦ Profit maximisation is not the same as shareholder wealth maximisation. Some factors a profit comparison does not allow for are: – future prospects; – risk; – accounting problems;  © Pearson Education Limited 2008 7 CFML_CH01v3. QXD 29/7/08 17:25 Page 8 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition – communicati on; – additional capital. Corporate governance. Large corporations usually have a separation of ownership and control. This may lead to managerialism where the agent (the managers) take decisions primarily with their interests in mind rather than those of the principals (the shareholders). This is a principal-agent problem. Some solutions: – link managerial rewards to shareholder wealth improvement; – sackings; – selling shares and the takeover threat; – corporate governance regulation; – improve information flow.  ¦ The efficiency of production and the well-being of consumers can be improved with the introduction of money to a barter economy. Financial institutions and markets encourage growth and progress by mobilising savings and encouraging investment.  ¦ Financial managers contribute to firms’ success primarily through investment and finance decisions. Their knowledge of financial markets, investment appraisal methods, treasu ry and risk management techniques are vital for company growth and stability.  ¦ Financial institutions encourage the flow of saving into investment by acting as brokers and asset transformers, thus alleviating the conflict of preferences between the primary investors (households) and the ultimate borrowers (firms). Asset transformation is the creation of an intermediate security with characteristics appealing to the primary investor to attract funds, which are then made available to the ultimate borrower in a form appropriate to them. Types of asset transformation: – risk transformation; – maturity transformation; – volume transformation.  ¦ Intermediaries are able to transform assets and encourage the flow of funds because of their economies of scale vis-a-vis the individual investor: – efficiencies in gathering information; – risk spreading; – transaction costs.  ¦ The secondary markets in financial securities encourage investment by enabling investor liquidity (being able to sell quickly and cheaply to another investor) while providing the firm with long-term funds.  ¦ The financial services sector has grown to be of great economic significance in the UK. Reasons: – high income elasticity; – international comparative advantage.  ¦ The financial sector has shown remarkable dynamism, innovation and adaptability over the last three decades. Deregulation, new technology, globalisation and the rapid development of new financial products have characterised this sector. Banking sector: – Retail banks – high-volume and low-value business. – Wholesale banks – low-volume and high-value business. Mostly fee based. – International banks – mostly Eurocurrency transactions. – Building societies – still primarily small deposits aggregated for mortgage lending. – Finance houses à ¢â‚¬â€œ hire purchase, leasing, factoring. 8  © Pearson Education Limited 2008 CFML_CH01v3. QXD 29/7/08 17:25 Page 9 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition  ¦ Long-term savings institutions: – Pension funds – major investors in financial assets. Insurance funds – life assurance and endowment policies provide large investment funds.  ¦ The risk spreaders: – Unit trusts – genuine trusts which are open-ended investment vehicles. – Investment trusts – companies which invest in other companies’ financial securities, particularly shares. – Open-ended investment companies (OEICs) – a hybrid between unit and investment trusts.  ¦ The risk takers: – Private equity funds – invest in companies not quoted on a stock exchange. – Hedge funds – wide variety of investment or speculative strategies outside regulators’ control.  ¦ The markets: Th e money markets are short-term wholesale lending and/or borrowing markets. – The bond markets deal in long-term bond debt issued by corporations, governments, local authorities and so on, and usually have a secondary market. – The foreign exchange market – one currency is exchanged for another. – The share market – primary and secondary trading in companies’ shares takes place on the Official List of the London Stock Exchange, techMARK and the Alternative Investment Market. – The derivatives market – LIFFE (Euronext. liffe) dominates the ‘exchange-traded’ derivatives market in options and futures. However there is a flourishing over-the-counter market. There are no numerical questions in this chapter; answers may be found from reading the text.  © Pearson Education Limited 2008 9 CFML_CH02v3. QXD 29/7/08 17:26 Page 10 Chapter 2 PROJECT APPRAISAL: NET PRESENT VALUE AND INTERNAL RATE OF RETURN L EARNING OUTCOMES By the end of the chapter the student should be able to demonstrate an understanding of the fundamental theoretical justifications for using discounted cash flow techniques in analysing major investment decisions, based on the concepts of the time value of money and the opportunity cost of capital. More specifically the student should be able to:  ¦ calculate net present value and internal rate of return;  ¦ show an appreciation of the relationship between net present value and internal rate of return;  ¦ describe and explain at least two potential problems that can arise with internal rate of return in specific circumstances;  ¦ demonstrate awareness of the propensity for management to favour a percentage measure of investment performance and be able to use the modified internal rate of return. KEY POINTS AND CONCEPTS  ¦ Time value of money has three component parts each requiring compensation for a delay in the receipt of cash: the pure time value, or impatience to consume, – inflation, – risk.  ¦ Opportunity cost of capital is the yield forgone on the best available investment alternative – the risk level of the alternative being the same as for the project under consideration.  ¦ Taking account of the time value of money and opportunity co st of capital in project appraisal leads to discounted cash flow analysis (DCF).  ¦ Net present value (NPV) is the present value of the future cash flows after netting out the initial cash flow. Present values are achieved by discounting at the opportunity cost of capital. NPV = CF0 +  ¦ (1 + k)2 + †¦ CFn (1 + k)n 0 accept 0 reject CF1 1+r + CF2 (1 + r)2 + †¦ CFn (1 + r)n =0 The internal rate of return decision rule is: IRR IRR 10 CF2 Internal rate of return (IRR) is the discount rate which, when applied to the cash flows of a project, results in a zero net present value. It is an ‘r’ which results in the following formula being true: CF0 +  ¦ 1+k + The net present value decision rules are: NPV NPV  ¦ CF1 opportunity cost of capital – accept opportunity cost of capital – reject  © Pearson Education Limited 2008 CFML_CH02v3. QXD 29/7/08 17:26 Page 11 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition  ¦ IRR is poor at handling situations of unconventional cash flows. Multiple solutions can be the result.  ¦ There are circumstances when IRR ranks one project higher than another, whereas NPV ranks the projects in the opposite order. This ranking problem becomes an important issue in situations of mutual exclusivity.  ¦ The IRR decision rule is reversed for financing-type decisions.  ¦ NPV measures in absolute amounts of money. IRR is a percentage measure.  ¦ IRR assumes that intra-project cash flows can be invested at a rate of return equal to the IRR. This biases the IRR calculation.  ¦ If a percentage measure is required, perhaps for communication within an organisation, then the modified internal rate of return (MIRR) is to be preferred to the IRR. ANSWERS TO SELECTED QUESTIONS 3 Confused plc a Project C IRRs at 12. 1% and 286%. See Fig. 2. 1. NPV + 12. 1 – 286 Discount rate Fig. 2. 1 Project D No solution using IRR. See Fig. 2. 2. + NPV Discount rate – Fig. 2. 2 b This problem illustrates two disadvantages of the IRR method. In the case of project C multiple solutions are possible, given the non-conventional cash flow. In the case of project D there is no solution, no IRR where NPV = 0. c NPV Project C: +? 646 Project D: –? 200 Using NPV the accept/reject decision is straightforward. Project C is accepted and Project D is rejected.  © Pearson Education Limited 2008 11 CFML_CH02v3. QXD 29/7/08 17:26 Page 12 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition 7 Seddet International a Project A At 20%: –5,266 + 2,500 ? 2. 1065 = 0, ? IRR = 20% Project B At 7%: –8,000 + 10,000 ? 0. 8163 = +163 At 8%: –8,000 + 10,000 ? 0. 7938 = –62 IRR = 7 + 163 163 + 62 (8 – 7) = 7. 7% Project C At 22%: –2,100 + 200 ? 0. 8197 + 2,900 ? 0. 6719 = +12. 45 At 23%: –2,100 + 200 ? 0. 8130 + 2,900 ? 0. 6610 = –20. 5 IRR = 22 + 12. 45 12. 45 + 20. 5 (23 – 22) = 22. 4% Project D At 16%: –1,975 + 1,600 ? 0. 8621 + 800 ? 0. 7432 = –1 ? IRR is slightly under 16%. The IRR exceeds the hurdle rate of 16% in the case of A and C. Therefore if all projects can be accepted these two should be undertaken. b Ranking under IRR: Project Project Project Project C A D B IRR 22. 4% 20% 16% 7. 7% best project c Project A –5,266 + 2,500 ? 2. 2459 = 349 Project B –8,000 + 10,000 ? 0. 6407 = –1,593 Project C 2,100 + 200 + 0. 8621 + 2,900 ? 0. 7432 = 228 Project D –1,975 + 1,600 ? 0. 8621 + 800 ? 0. 7432 = –1 12  © Pearson Education Limited 2008 CFML_CH02v3. QXD 29/7/08 17:26 Page 13 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition Ranking Project A Project C Project D Project B NPV 349 best pro ject 228 –1 –1,593 Project A ranks higher than project C using NPV because it generates a larger surplus (value) over the required rate of return. NPV measures in absolute amounts of money and because project A is twice the size of project C it creates a greater NPV despite a lower IRR. This report should comment on the meaning of a positive or negative NPV expressed in everyday language. It should mention the time value of money and opportunity cost of capital and explain their meanings. Also the drawbacks of IRR should be discussed:  ¦ multiple solutions;  ¦ ranking problem – link with the contrast of a percentage-based measure and an absolute moneybased measure;  ¦ additivity not possible;  ¦ the reinvestment assumption is flawed.  © Pearson Education Limited 2008 13 CFML_CH03v3. QXD 29/7/08 17:26 Page 14 Chapter 3 PROJECT APPRAISAL: CASH FLOW AND APPLICATIONS LEARNING OUTCOMES By the end of this chapter the reader will be able to identify and apply relevant and incremental cash flows in net present value calculations. The reader will also be able to recognise and deal with sunk costs, incidental costs and allocated overheads and be able to employ this knowledge to the following:  ¦ the replacement decision/the replacement cycle;  ¦ the calculation of annual equivalent annuities;  ¦ the make or buy decision;  ¦ optimal timing of investment;  ¦ fluctuating output situations. KEY POINTS AND CONCEPTS  ¦ Raw data have to be checked for accuracy, reliability, timeliness, expense of collection, etc.  ¦ Depreciation is not a cash flow and should be excluded.  ¦ Profit is a poor substitute for cash flow. For example, working capital adjustments may be needed to modify the profit figures for NPV analysis.  ¦ Analyse on the basis of incremental cash flows. That is, the difference between the cash flows arising if the project is implemented and the cash flows if the project is not implemented: – opportunity costs associated with, say, using an asset which has an alternative employment are relevant; – incidental effects, that is, cash flow effects throughout the organisation, should be considered along with the obvious direct effects; sunk costs – costs which will not change regardless of the decision to proceed are clearly irrelevant; – allocated overhead is a non-incremental cost and is irrelevant; – interest should not be double counted by both including interest as a cash flow and including it as an element in the discount rate.  ¦ The replace ment decision is an example of the application of incremental cash flow analysis.  ¦ Annual equivalent annuities (AEA) can be employed to estimate the optimal replacement cycle for an asset under certain restrictive assumptions. The lowest common multiple (LCM) method is sometimes employed for short-lived assets. Whether to repair the old machine or sell it and buy a new machine is a very common business dilemma. Incremental cash flow analysis helps us to solve these types of problems. Other applications include the timing of projects, the issue of fluctuating output and the make or buy decision. 14  © Pearson Education Limited 2008 CFML_CH03v3. QXD 29/7/08 17:26 Page 15 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition A NSWERS TO SELECTED QUESTIONS 4 Mercia plc a Proposal 1 Consultant’s fee – sunk cost Central overhead – irrelevant Depreciation – irrelevant Time (years) ?000s 0 Earthmoving Construction Ticket sales Operational costs Council Senior management Opportunity cost Cash flows –1,650 3? 2 –100 –1,650 Discounted Cash flows 1 –150 –1,400 –200 +600 –100 –100 –50 +600 –100 –50 +150 0 +450 150 (1. 1)2 450/0. 1 (1. 1)2 + NPV = + ? 2. 193m Proposal 2 Central overhead (? 70,000) – irrelevant Consultants fees (? 50,000) – sunk cost Time (years) ?000s 0 1 2 3 –100 5,000 –4,000 –400 –100 5,000 –4,000 –400 –100 Design build Revenue Operating costs Equipment Executive Opportunity cost Sale of club –9,000 Cash flow –9,100 –100 Discounted cash flow –9,100 –100 1. 1 –100 +11,000 500 + 500 (1. 1)2 +11,500 + 11,500 (1. 1)3 NPV = –? 137,566 Recommendation: accept proposal 1 IRR Proposal 1: 20. 2% Proposal 2: 9. 4%  © Pearson Education Limited 2008 15 CFML_CH03v3. QXD 29/7/08 17: 26 Page 16 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition 5 Mines International plc a Survey – sunk cost Time (years) ?m Profit (loss) Add depreciation Capital equipment Survey 0 1 2 3 4 5 0 0 –4. 75 –2. 1 0 –4. 75 0. 30 3. 9 2. 0 4. 7 2. 0 4. 7 2. 0 2. 9 2. 0 1. 5 0 0 0 2. 0 –2. 0 2. 0 2. 25 –0. 25 2. 25 2. 25 0 2. 25 1. 75 +0. 50 1. 75 0 +1. 75 0. 125 0. 125 0. 125 0. 10 0 –0. 25 0. 10 0 –0. 10 Debtor adjustment: Opening debtors Closing debtors Creditor adjustment Opening creditors Closing creditors 0 0. 15 +0. 15 Overheads Hire cost Cash reserves Government refund Cash flow Discounted cash flow 0. 2 0. 15 0. 10 0. 10 0. 125 –0. 05 +0. 025 0. 2 0. 2 –0. 1 0. 2 –1. 0 5. 125 0. 2 +1. 0 +0. 2 –5. 75 –5. 75 –6. 20 4. 05 6. 575 6. 9 8. 075 1. 85 –6. 20 + 4. 05 + 6. 575 + 6. 9 + 8. 075 + 1. 85 1. 12 (1. 12)2 (1. 12)3 (1. 12)4 (1. 12)5 (1. 12)5. 125 = –5. 75 – 5. 536 + 3. 229 + 4. 680 + 4. 385 + 4. 582 + 1. 035 = ? 6. 625m The maximum which MI should bid in the auction is ? . 625m. This additional cash outflow at time zero would result in a return of 12% being obtained. (Some students may time the final debtor and creditor payments at time 5. 25 as time 6. ) b IRR = 29. 4%. c Points to be covered:  ¦ Time value of money.  ¦ Opportunity cost of money for a given risk class.  ¦ Sunk cost.  ¦ Treatment of depreciation.  ¦ Allocated overhead treatment.  ¦ Cash injections.  ¦ Hire cost – opportunity cost. Comparison of NPV with other project appraisal methods: Advantages over IRR: – measures in absolute amounts of money; – ranking problem; – multiple solution problem. 16 Pearson Education Limited 2008 CFML_CH03v3. QXD 29/7/08 17:26 Page 17 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition  ¦ Advantages over payback: – time value of money a llowed for; – all cash flows considered; – cash flows within pay back period considered properly.  ¦ Advantages over ARR: – firm theoretical base, time value of money; – defined decision criteria. 7 Reds plc One-year cycle: Time (years) 0 1 –10,000 –12,000 8,000 – 4,000 NPV = –10,000 – 4,000 ? 0. 9009 = –13,604 AEA = –13,604 0. 9009 = –? 15,100 Two-year cycle: Time (years) 0 1 2 –10,000 –12,000 –13,000 ,500 –6,500 NPV = –10,000 – 12,000 ? 0. 9009 – 6,500 ? 0. 8116 = –26,086 AEA = –26,086 1. 7125 = –? 15,233 Three-year cycle: Time (years) 0 1 2 3 –10,000 –12,000 –13,000 –14,000 3,500 –10,500 NPV = –10,000 – 12,000 ? 0. 9009 – 13,000 ? 0. 8116 – 10,500 ? 0. 7312 = –39,039 AEA = –39,039 2. 4437 = –? 15,975 Reds should replace the machinery on a one-y ear cycle.  © Pearson Education Limited 2008 17 CFML_CH03v3. QXD 29/7/08 17:26 Page 18 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition 8 Immediate replacement: Time (years) 0 1? +4,000 –15,100 +4,000 –15,100 0. 11 = –? 133,273 Replacement after one year: Time 0 + 2? –2,000 –2,000 1 3,000 –15,100 0. 9009 – 15,100/0. 11 1. 11 3,000 ? = –? 122,966 Replacement after two years: Time 0 1 2 3? –2,000 –1,000 +1,500 –15,100 –2,000 –1,000 ? 0. 9009 + 1,500 ? 0. 8116 –15,100/0. 11 (1. 11)2 = –? 113,097 Recommendation: Commence replacement cycle after two years. 10 Curt plc Incremental cash flows Time (years) 0 –70,000 –28,000 28,000 37,000 47,100 68,410 ? ? ? ? ? 0. 8621 0. 7432 0. 6407 0. 5523 0. 4761 2 3 4 5 0 –70,000 100,000 –80,000 –48,000 110,000 –82,000 121,000 –84,000 133,100 –86,000 146,410 –88,000 10,000 –70,000 Current cash flows New plan 1 –28,000 28,000 37,000 47,100 68,410 = = = = = = –70,000 –24,139 20,810 23,706 26,013 32,570 8,960 The positive incremental NPV indicates that acceptance of the proposal to manufacture in-house would add to shareholder wealth. 18  © Pearson Education Limited 2008 CFML_CH03v3. QXD 29/7/08 17:26 Page 19 Glen Arnold, Corporate Financial Management Lecturer’s Guide, 4th edition Other factors: some possibilities The relative bargaining strength of Curt and its supplier. Perhaps a search for another supplier would be wise. Perhaps it would be possible to negotiate a multi-year price agreement. Are there some other incidental effects Curt has not considered, e. g. factory space usage? 12 Netq plc Output per year: 1,000 ? 0. 3333 ? 2 1,000 ? 0. 3333 ? 0. 75 ? 2 1,000 ? 0. 3333 ? 0. 5 ? 2 = 667 500 333 1,500 Cost of annual output 1,500 ? ?4 = ? 6,000 PV = 6,000/0. 13 = ? 46,154 Both machines replaced: Annual costs 1,500 ? ?1. 80 = ? 2,700 PV = 14,000 + 2,700 0. 13 = ? 34,769 One machine is replaced: Old Output: first third of year second third of year last third of year New 333. 3 166. 7 0 500 333. 3 333. 3 333. 3 1,000 Annual costs 500 ? 4 + 1,000 ? 1. 8 = ? 3,800 PV = 7,000 + 3,800 = ? 6,231 0. 13 The lowest cost option is to replace both machines. 14 Opti plc Costs One-year replacement: PV = 20,000 – 6,000/1. 1 = 14,545 AEA = 14,545/0. 9091 = 16,000 Two-year replacement: PV = 20,000 + 6,000/1. 1 – 1,000/(1. 1)2 = 24,629 AEA = 24,629/1. 7355 = 14,191 Three-year replacement: PV = 20,000 + 6,000/1. 1 + 8,000/(1. 1)2 + 4,000/(1. 1)3 = 35,072 AEA = 35,072/2. 4869 = 14,103 Four-year replacement: PV = 20,000 + 6,000/1. 1 + 8,000/(1. 1)2 + 10,000/(1. 1)3 + 10,000/(1. 1)4 = 46,410 AEA = 46,410/3. 1699 = 14,641 The optimal replacement cycle is 3 years.  © Pearson Education Limited 2008 9 CFML_CH04v3. QXD 29/7/08 17:27 Page 20 Chapter 4 THE DECISION-MAKING PROCESS FOR INVESTMENT APPRAISAL LEARNING OUTCOMES The main outcome expected from this chapter is that the reader is aware of both traditional and discounted cash flow investment appraisal techniques and the extent of their use. The reader should also be aware that these techniques are a small part of the overall capital-allocation planning process. The student is expected to gain knowledge of:  ¦ the empirical evidence on techniques used;  ¦ the calculation of payback, discounted payback and accounting rate of return (ARR); How to cite Corporate Financial Management Lecturer’s Guide, Essay examples

Project Communications and Information for Ruddy Milk Dairies

Question: Discuss about the Project Communications and Information for Ruddy Milk Dairies. Answer: Background This project has for Ruddy Milk Dairies has been initiated with an aim to have an integrated information and communication system in the organization. The aim is to enhance the growth of the business and improve its prosperity. It has been identified that and the enhanced system would be beneficial in yielding the best results for the business and an efficient delivery system would be the most effective for the best practice. The project information tools used in this project are android based apps. The apps are used with an objective of attracting people to towards developing a positive outcome for the business. The business develops Project Management Information System (PMIS) for helping the business managers with a real life feed of business related data to take proper decisions on time (Hasan, Shamsuddin Aziati, 2013). The system would help in providing the needed forecasts for tasks like milking times, cattle feeding or washing time, or output per animal. Discussion The Project Management Information System (PMIS) is a structure that is utilised to measure the success rate of any project and presents the required information in terms of monitoring and controlling the project. A PMIS can be utilised as a structure that can guide the progression of any project and assist in raising its success rate. It is effective in bringing accurate and appropriate information to the management inside the essential time frame, and additionally aids in speeding up the decision-making process and any other required actions for ensuring that the project is on the right path in regards to its time, budget and objectives (Canils Bakens, 2012). The complete method of implementing a Project Management Information System (PMIS) is a long term attempt that leads at times from project chaos to a steady, conventional project management environment. It requires a lot of patience, effort and time, along with executive support in establishing an advanced project management culture. Many companies attempt following the path of project management superiority. However, most of them just attempt to succeed (Braglia Frosolini, 2014). A project's execution is measured and recorded in bolstered edges. The structures are investigated and joined into reports by PMIS to address accommodating activities. Information is not be amassed on the off chance that they are not going to be broke down. This is essential to stay away from data over-weight. PMIS reports ought to see principal control focuses on the target that supportive moves can be made (Bassi 2017). Elements of Project Management Information System (PMIS) The Project Management Information System incorporates inputs, transformation, outputs and feedback. Inputs: It incorporates information conveyed inside by different project plots on an irregular begin. Outside sources can in like way make information, for instance, practical work environments can offer information to project. Transformation: It contains examination, stockpiling, recovery and spreading of information and data. Outputs: It incorporates standard and uncommon reports about project execution. Feedback: It offers data to refresh PMIS to wellsprings of information and change works out. (Seymour and Hussein, 2014) Robotized PMIS are most typically used to combine information in projects. Decision support system database is utilized to break down information. The software is carefully picked (Killen Kjaer, 2012). The organizational analysis showed there is a need to bring in more effective project management practices. There was a dearth of knowledge regarding where to start and the requirement for external expertise in this matter. Another challenge that came up was the lack of information regarding the projects and the capability to deliver them. To research the situation at the organization regarding the project, two stages were decided upon: maturity assessment and methodology development. Maturity Assessment The fundamental walk is to evaluate where the connection truly was the time when it came to standard project management rehearses. There is no such thing as a standard way to deal with oversee project management. An ordinary project management approach exists in the connection. There was a huge store of work seen as projects. However these were not formal projects, and in this manner, nobody was controlling them; the increase was creeping, due dates were not settled. There was no standard project management toolbox open either. Similarly, of this stage, a guide for further project management work change was made (Kerzner, 2013). PM Workshops From the early circumstances of the project, there was a need to guarantee that the social affair of individuals working saw what make project management is about. So a workshop is progressed toward the coveted condition of the project management. The social event of people would be the certifiable assistants of the project. Particularly asked for they would be comfortable with best practices in the start, sorting out, execution, watching and control, and shutting the project. Methodology Development Ensuing to get-together necessities amidst the workshop, an examination would be done of what was found. It would take two specialists from Ruddy Milk Dairies and 2 weeks of working days to set up a preparatory elucidation of the project management methodology, both a technique and supporting documentation outlines. Since just MS Office documentation can be utilized, and there is no budgetary course of action for any Project Management Information System (PMIS) to be executed rapidly, the methodology to be utilized is to take it move and attempt to make project lifecycles in light of direct MS Office instruments as opposed to moving from a no-devices condition especially to PMIS (Kendrick, 2013). The methodology would meld two project management shapes: One for key Ruddy Milk Dairies projectsthose that have higher threat, higher spending masterminds, greater identity boggling, entire arrangement, cross-supportive, including diverse outside suppliers; One for headway projects of Ruddy Milk Dairies those that are right current, low-requirement, satisfactory, and low-spending game plan, all things considered, done by inside assets. Refinements in the Methodology Taking a time of understanding the PMIS methodology for Ruddy Milk Dairies, a few unnoticeable refinements would be presented in the frameworks. Not greatly different, since the entire structure would notwithstanding be especially fragile. Criticism would be collected from the project supervisor to make them feel they can impact the present standard. In the context of the social affairs and audits, a synopsis of refinements would be readied. The synopsis would be shown to the top regulatory staff with the data on what were the run of the central mill purposes of the proposed changes. The board if consents to the proposed heading of the developments, the project directors would set out to acclimate them with their projects (Kaiser, El Arbi Ahlemann, 2015). Post-Implementation Phase Eventually, after the Ruddy Milk Dairies project is done, the affiliation would plan to show an overhauled, completely self-sufficient elucidation of the methodology that would be fortified by the Project Management Information System (PMIS). The affiliation is so far working up to that methodology, opening up their project portfolio, and unequivocally supporting its position in the dairy market (Ghosh et al., 2012). Rationale The methodology was chosen to make the most of any projects taken up for Ruddy Milk Dairies and acquire the best indispensable business results. This methodology is an inventory for the roles, activities, artifacts, techniques and concepts used in a project. It does not command a typical project lifecycle. Schedule Task Responsible Planned completion Date Distribute projects information requirements Project Manager Week 2 Train staff on use of PMIS Consultant Week 5 Prioritize information needs Project Manager Week 3 Conduct Surveys Project Staff Week 6 Collect and analyze survey information ME Coordinator Week 8 Report initial results Project Manager Week 10 Conclusion A champion among the most fundamental sections of a capable project management methodology affiliation is a solid and faithful sponsorship from C-suite associates. Without their dedication in the meantime, it will be difficult to change the way connection carries on in the entire arrangement. In like manner, it is inadequate to organize the front line project management set up, the key is to acknowledge it and certification that the alliance is utilizing it, and furthermore guarantee it brings business benefits. It is to be inspected that things require some authentic essentialness, and one ought not to expect that progressions will happen. It is a to some degree solid movement pushed from the base of the association with a firm support from the top. References Bassi, A. (2017). Project Management Body of Knowledge in the Context of PMI and ISO. InKnowledge and Project Management(pp. 53-67). Springer International Publishing. Braglia, M., Frosolini, M. (2014). An integrated approach to implementing project management information systems within the extended enterprise.International Journal of Project Management,32(1), 18-29. Canils, M. C., Bakens, R. J. (2012). The effects of Project Management Information Systems on decision making in a multi project environment.International Journal of Project Management,30(2), 162-175. Ghosh, S., Forrest, D., DiNetta, T., Wolfe, B., Lambert, D. C. (2012). Enhance PMBOK by Comparing it with P2M, ICB, PRINCE2, APM and Scrum Project Management Standards.PM World Today,14(1), 1-77. Hasan, Y., Shamsuddin, A., Aziati, N. (2013). The impact of management information systems adoption in managerial decision making: A review.The International Scientific Journal of Management Information Systems,8(4), 010-017. Kaiser, M. G., El Arbi, F., Ahlemann, F. (2015). Successful project portfolio management beyond project selection techniques: Understanding the role of structural alignment.International Journal of Project Management,33(1), 126-139. Kendrick, T. (2013).The Project Management Tool Kit: 100 tips and techniques for getting the job done right. AMACOM Div American Mgmt Assn. Kerzner, H. (2013).Project management: a systems approach to planning, scheduling, and controlling. John Wiley Sons. Killen, C. P., Kjaer, C. (2012). Understanding project interdependencies: The role of visual representation, culture and process.International Journal of Project Management,30(5), 554-566. Seymour, T., Hussein, S. (2014). The history of project management.International Journal of Management Information Systems (Online),18(4), 233.