M4 Assignment 2: Project Financing

Financial Decisions

Name

Institution

Introduction

Financial decisions are important factors within a dynamic economic environment. They tend to drive one to appropriate finality. It is imperative to be aware of necessary tools of measurement and parameters to take into account such as Return on investment(ROI), Net present value (NPV) and link them to various decisions and available alternatives. Decision making involves judiciously ascertaining an appropriate mode and means of approaching a given opportunity or threat. The decision-making scenario at hand involves deciding whether to involve corporate culture in boosting employee motivation as well as time management. Therefore, the paper seeks to establish if the decision made was good with an appropriate definition of the term good about the situation. Decision making requires both hard and smart work, and just like any other achievement, there must be a commitment (Springer and Borthick, 2004).

Net Present Value (NPV) and Return on Investment (ROI)

Net present value refers to the total value after taking into consideration both inflows and outflows under a particular discount rate. Of course, costs and risks involved must be precisely considered. Underestimating and overestimating cash flows in project formulation presents risks of failure in that the project may not be undertaken as required. Therefore, risk, as well as return correction, must be appropriately done under stringent measures to allow for effective cash flow determination.

On the other hand, return on investment refers to the net output of a given project. Every amount invested in a project must be accounted for the benefits and profitability through determination of the overall returns as a result of undertaking the project. A percentage return rate is always vital in presenting the ration and portions of gains as a factor of the total investment. It is therefore essential in assessing how a project is generating profits and compensating for the expenditures incurred. A smaller percentage of returns is always undesirable and thus can lead to throwing out of the project and looking for an alternative or improving on the available investment schemes.

For instance, if an investor decides to engage in an investment plan with a 10 percent of his/her capital, there is an anticipated output regarding overall returns that predict the productivity as well as the profitability of the entire plan. A well-calculated move will help in making decisions on whether or go on or drop off the project.

For the first scenario on the acquisition of a Nissan Rogue, option one is much appropriate. The car goes at $32000, and a down payment of $10000 is required with a six-year installment under an interest of 4%. This is because it has a higher Net Present Value as compared to the second scenario. To determine the final value, the discounted cash flows have to be taken into consideration. Besides, a car hire service is a temporary service that only gives an abstract of imaginable returns. It, therefore, has no value attached returns that can substantiate it as a probable investment plan. For instance, it can be entirely considered as a liability since it offers a temporary service under high costs that correlate with the costs of buying the same car using a different plan.

As per the second scenario, option one is still the best since it has a higher net present value as compared to option two for renting the house at $1700 per month. For a house, both the net present value and returns on investment are vital in deciding whether to lease or buy a house. A home may be purchased and leased off to gain more profits thus higher returns on investment. Besides, the taxes on rent are not considered in buying the house. Based on logical reasoning, a home that is leased is not desired. A house that is bought is much profitable as it becomes an individual asset which can be manipulated in any way to develop an income generating scheme. Any deteriorations in value can be curbed through renovations that are vital to continuous quality improvement.

The calculations for each scenario have been formulated for reference purposes and ascertaining or justifying the decisions reached at. In both situations, the most critical factor is the time value of money and its capabilities to give the desired return satisfactorily. The more the net present worth, the better the option. For instance, a constant discount rate of 1.05% was used in determining the various discounted cash flows (DCF).

In general, a decision to entirely purchase a given item is better than leasing for a short-term period. This is because the net present value of bought entities seems to be higher as compared to the entities leased. Besides, leased property is temporary, and thus one can not fully exploit and get maximum returns from it apart of the service. It is, therefore, more judicious to identify with a given investment plan thoroughly as an owner rather than leased property which is still under the custody of either a tenant or a leasing company. Besides, there is a transfer of risks and compensation plans in case of damage. Damaging a leased property may call for a service fee which is higher than the amount required for the actual purchase of an item. It is thus desirable to purchase an item.

Conclusion

Financial decisions are complicated with sophistication increasing with the increase in the size of the entities to be considered. In case a company has a diversified culture, and complex elements, difficulties may arise in satisfying the entire workforce. Thus, there is a need for profound knowledge and commitment to achieve the desired outcome. Besides, presentation of arguments with facts helps in flexible decision making. From actualization, different departments embracing the results are realizing profits and overall work improvement. On the other hand, employing continuous improvement in a firm provides forever rising the quality of services and the products offered by a particular firm and acts as a modification to the decision-making process that tends to add value.

References

DeFusco, R. A., McLeavey, D. W., Pinto, J. E., Anson, M. J., & Runkle, D. E. (2015). Quantitative investment analysis. John Wiley & Sons.

Springer, C. W., & Borthick, A. F. (2004). Business simulation to stage critical thinking in introductory accounting: Rationale, design, and implementation. Issues in accounting education, 19(3), 277-303.

Stevenson, W. J., & Sum, C. C. (2002). Operations management (Vol. 8). New York, NY: McGraw-Hill/Irwin.