MASTER BUSINESS ADMINISTRATION (MBA)

MBFM 230: FINANCIAL MANAGEMENT

ASSIGNMENT 2

Question 1

The rapid economic environment changes that is happening in the world and specifically in the country (Malaysia) has made the financing decisions to be more challenging and it requires sophisticated approach in identifying the right decisions. The facility managers need to be responsible in participating in the creation of financial planning, capital budgeting, having the right balance of capital structure and its financial reporting. They also require to have stronger strategic dimension that is able to anticipate and be flexible enough to accommodate the possible changes in the environment they are operating in.

You as a facility manager must be able to overcome some if not all the financial management challenges faced. Explain the challenges faced.

Question 2

Capital budget is the process of creating a long run planning decisions for investments in projects (Horngren, 2015). The managers will make decision in selecting a few of the various projects that may run into several periods. In order to make the right or most viable decisions, the managers need to analyse each project by considering all the life-span cash flows from its initial investment through its termination or end of the project.

Describe the stages involved in making the capital budget decision.

Question 3

The success of the organisation would be determined by the capacity to generate positive cash flow. It is easier to forecast more accurately the cash flow of those projects or businesses that are already running or in existence as compared to those new and recently undertaken. Inaccurate cash flow forecast may lead to disastrous outcome such as acceptance of an unprofitable projects or rejecting profitable projects.

Explain the major areas to consider when managers are undergoing strategy to estimate cash flow.

Question 4

There are similarities between the business cycle in various industries. A facility or construction company will own and lease some assets to support their operations undergo changes that can be said to have parallel likeness to those of other industries such as those in manufacturing products and services. Multiple stages of product or services development may occur in the same company, so the facilities manager will have to track the various stages for each product and services, and be prepared to allocate space or provide the necessary services accordingly. The placement of any project within conventional stages of development has a definite effect on whether a projects costs are classified as capital or expense.

Explain each of the stages involved in conventional stages of development.

Question 5

Applying the concept of payback period, you were given the following information.

Table 2(a) illustrates the cash flows from a proposed investment with initial investment is $100,000. If we require a payback period of, say, three years or less is this investment acceptable? Explain your decision.

Year	Net Project Cash Flows (RM)
0	- RM 100,000
1	50,000
2	20,000
3	10,000
4	10,000
5	10,000

Question 6

Suppose you are asked to decide whether a new project should be launched. Based on the projected sales and costs, we expect that the cash flow over the five-year life of the project will be $2,000 in the first two years, $4,000 in the next two, and $5,000 in the last year. It will cost about $10,000 to begin the project. We use a 10 percent discount rate to evaluate new project. Explain your decision in this case?

Question 7

In markets theory, all the projects that add to companys value and increase shareholders wealth should be invested in. However, most companies practice capital rationing as a way to choose the best projects under the existing capital limitations. What are the advantages and disadvantages of capital rationing?

Question 8

The analysis of the financial performance is to determine the meaning and significance of the financial data to check the performance in past, forecast for the future business performance and verifying the financial strength of the organisation. Therefore, there are two procedural groups. Describe each of the group.

Question 9

You have been appointed as a Project Manager for Maya Construction Company. The company is about to select a group of independent projects competing for the companys capital budget of $6.0 million. The firm recognized that its cost of capital is 14%. The company Chief Executive Officer (CEO) has given you the summarized key information (refer to Table 4.1) to be used in selecting the best group of projects.

Table 4.1 Project Information Project	Initial Investment	Internal Rate of Return (IRR)	Present Value (PV) of Inflows at 14%
A	$7,500,000	16%	$7,600,000
B	$ 650,000	17%	$ 950,000
C	$1,800,000	15%	$2,100,000
D	$1,450,000	20%	$1,700,000
E	$ 950,000	25%	$1,150,000
F	$2,400,000	21%	$2,800,000
G	$1,200,000	22%	$1,500,000
H	$ 900,000	19%	$1,000,000

Required:

1) What is capital rationing? In theory, should capital rationing exist? Why does it frequently occur in practice?

2) Apply the internal rate of return (IRR) approach to select the best group of projects.

3) Apply the net present value (NPV) approach to select the best group of projects.

4) Which projects should you recommend to be implemented by the company?