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Respond to  your classmates by sharing additional costs and benefits of a worldwide standard for financial reporting that they have not yet considered.

 

 

1. The article mentions, “Working capital is used to fund day-to-day operations at companies, so in addition to receivables, it could cover expenses such as payroll and the costs of procuring, storing and managing inventory” (Biery, 2013).  One factor that comes into play is the fact that there are low interest rates available.  With these interest rates, companies can borrow money in order to buy inventory or get competitors.  If they can fund these, the business should be able to increase the working capital (Biery, 2013). 

Regarding this article, the short-term lender is concerned more on the stock of cash.  “It’s also possible that companies are seeking financing because they’re having a harder time meeting their short-term obligations…” (Biery, 2013).  Most companies are not able to finance the operating cycle with accounts payable financing on its own so they need the working capital.  This shortage is usually covered by net earnings made internally or by borrowed funding or by both.

It is not possible in today’s business to operate with no current liabilities. “Fifty-seven percent of banking professionals surveyed believed the current economic situation makes it less likely their clients will increase their capital expenditures, compared with 24 percent who said the economy made it less likely” (Biery, 2013).  Managing current liabilities is vital for a company’s cash flow process.  Failure to properly manage current liabilities result in issues in working capital that may lead to failure of daily operations.

Angie

 

Reference

Biery, M. (2013). Businesses seeking working capital—survey. Retrieved on March 29, 2015 from http://www.forbes.com/sites/sageworks/2013/04/12/businesses-seeking-working-capital-survey/

 

2. After reading the journal article, "Businesses Seeking Working Capital-Survey," businesses should use working capital analysis to fund day-to-day operations, and to cover expenses such as payroll and the costs of procuring, storing, and managing inventory (Biery, 2013). One factor at play could be the record-low interest rates (Biery, 2013). With low interest rates, companies can pay back the loans in no time. Also, businesses can increase their productivity, and hire more employees, because they can fund these things, and it will make their working capital increase.

The short-term lender is more focused on the stock of cash. With interest rates being so low, "companies may now see that as an opportunity to get additional working capital to enhance their processes or to increase their level of productivity," (Biery, 2013). The reason that businesses take out loans is, because they are having a hard time with the flow of cash. So, they need help with the funding, and borrow money to help them out.

I do not think it is possible in today's business to operate with no current liabilities, because then businesses would need to have a large cash reserve put aside. How the economy is, it is impossible for companies to operate without a current liability. Companies now days are having to invest their money, because of the time value that the money have.

Biery, M.E. (2013). Businesses Seeking Working Capital-Survey.. Retrieved from http://www.forbes.com/sites/sageworks/2013/04/12/businesses-seeking-working-capital-survey/.

 

3. The time value of money is considered by the Net Present Value (NPV) method for capital budgeting.  This means the value of the dollar at present time is more than in the future.  The whole reason for this saying is the profit because people can invest money to make profit or gain interest.  When using the capital rate of a firm, it computes the reduced cash flow and it can be measured easily.  “One of the most important tools you will learn in this class is computing the net present value (NPV) of a proposed investment using discount cash flow analysis” (Byrd et al, 2013).

 

The Internal Rate of Return (IRR) is used for measuring the profit on investments along with the risk related to it.  The alternate profits are equated by using an increase capital rate.  IRR is a refined tool to utilize in capital budgeting however it is still commonly used by companies due to financial managers’ primary concern with high return for profit.  If we assume that NPV is zero, then the investment would not be acknowledged, but if the NPV surpasses zero, the plan would be acknowledged.  Conversely, payback technique is quite easy, that mentions how fast a company can obtain its capital back by refunds.  I think this means the most direct way for a refund will be acknowledged but it won’t recognize account profitability.  The method used to compare investments depend on the organization.

Two examples and evidence are from the following:  (1) In America, the combination of NPV and IRR methods are both used to market the loblolly pine fruit (Godsey, 2011). (2) A Sports Retail industry uses NPV tool as an investment evaluation but for shares with greater risks; although IRR is a favored method (Karen, 2011).

Angie

References

Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint

Godsey, L. (2011). Modeling the financial impact of management decisions on loblolly pin (pinus taeda) production. Retrieved on March 29, 2015 fromhttps://mospace.umsystem.edu/xmlui/bitstream/handle/10355/10264/research.pdf?sequence=3

Gui, K. (2011). Real options methodology in sportswear retail investment valuation. Retrieved on March 29, 2015 from http://pdxscholar.library.pdx.edu/cgi/viewcontent.cgi?article=1144&context=open_access_etds

 

4. Essentially, to identify value-creating projects, businesses use either the net present value or internal rate of return criteria (Byrd, Hickman, & McPherson, 2013). Thee internal rate of return considers the time value of money. This is one of the easiest and simplest method for businesses to use. It gives businesses a quick snapshot of what capital projects would provide the greatest potential cash flow (Lanctot, 2015) It is important to know that companies can add value to the business and increase owner's wealth by pursuing positive NPV projects, or project's whose IRR exceeds its required return (Byrd, Hickman, & McPherson, 2013). Grubbstrom & Kingsman (2004) consider the NPV of an EOQ decision when it is known that there will be a future price increase (Page 424).

Net Present Value also considers the time value of money. This means that the value of whatever the amount is now, is more important than what it would be years from now. The money gained later or interest on that dollar is not that important. NPV directly measures the present value of the cash flows a project is expected to generate (Byrd, Hickman, & McPherson, 2013).

The payback approach is an easy method to use. It is "how many years it takes for a project to recoup its initial investment," (Byrd, Hickman, & McPherson, 2013). This ignores the time value of money. The reason that it does not consider the time value of money is, because the Internal Rate of Return and the Net Present Value are more preferred.

I do not think one is better than the other one, because companies have their own preference on which method they like to use the best. Decisions are usually made based on excess profits above the rate of return requirements calculated by the net present value principle (Juhasz, 2011, pg. 46).

Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint Education Inc.

Disney, S.M., Warburton, R.H., & Zhong, Q.C. (2013). Net Present Value analysis of the Economic Production Quantity. IMA Journal of Management Mathematics, 24(4), 423-435.

Juhasz, L. (2011). Net Present Value versus Internal Rate of Return. Economics and Sociology, 4(1), 46-53.

Lanctot, P. (2015). The Advantages and Disadvantages of the Internal Rate of Return Method. Retrieved from http://smallbusiness,chron.com.

    • 9 years ago
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