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replies.docx1. maliek quandil
Capital analysis is a measurement tool to compare assets to liabilities. This method allows the organization to understand where their organization is at whether they are positive or negative. T His method should only be used from time to time because then they would be able to understand where the organization is standing if something were to go right or to go wrong. For a short term lender the flow of cash is more important. The reason I believe it is, is because the organization will be able to use this cash flow to purchase more assets. At the same time, the loan that they may be taking out may be a liability but at the same time they will be bringing in more assets then before. So, it would be making up for the increase of liabilities. In today's business it can be pretty tough to operate with no current liabilities because organizations are always striving for more. So, the more assets that they have the more the organization will grow. organizations will take out loans which are liabilities if it is at little expense to them. Doing this it will help them grow into an even better organization and be able to bring in more assets. Having no current liabilities, would be tough to do as an organization due to an organization always striving for more.
2. Malia
According to Biery (2013), "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." (para 2). When a business uses working capital analysis, they can better understand the liquidity of their assets and compare that to their liabilities. This can help a businesses make decisions like how much inventory to buy and how much they can afford to grow and expand. As detailed in the article, when interest rates are as low as they are, businesses can use working capital analysis to determine how much capital they have to enhance processes and become more efficient (Biery, 2013).
Stock of cash means how much a business has currently while the flow of cash is how much they receive and use. For a short-term lender, flow of cash is more important. Cash flow is what makes a business profitable and it is the baseline of keeping a business running. If you are a short-term lender, you want to make sure a company will be able to pay you back, which is why you want to know that they have sufficient cash flow.
Current liabilities are anything that needs to be paid back within a year's time. It is possible but very unlikely that a business can operate with no current liabilities. If they had no current liabilities, a business would either need access to a lot of cash reserves or they would need to have long-term liabilities. Long-term liabilities usually have higher interest rates, so it is unlikely businesses would want to go this route.
3. april
IRR, NPV, and the payback period are methods to calculate return on investment and aid in the decision making process. Financial managers can use one of the methods or a combination of them to evaluate projects and make capital budgeting decisions. The IRR method compares the expected return for a project to the rate of return that is required by the company. If the IRR is more than the required rate of return, the project will add value to the company and should be pursued (Byrd, Hickman, McPherson, 2013). IRR can be difficult to calculate unless a financial calculator or computer program is used. The disadvantage of IRR is the way it accounts for the time value of money. The IRR method calculates that future cash flows from a project will be reinvested at the IRR, not at the company’s cost of capital, and therefore doesn’t reflect the cost of capital and time value of money as accurately as the NPV method (Gallo, 2016). NPV measures the value added to the company by the project taking into account the initial investment, the time value of money, and the cash flows the project should generate. The disadvantages of using the NPV method are that projects with large returns in the early years and projects with low investment costs will have a higher NPV value than other projects (Gable, 1992). The NPV method also does not take into account the amount of risk that may apply to each project. The payback period method is the simplest to calculate. It calculates the amount of time it will take the project to earn back the amount of the initial investment. While payback method is the easiest to use, it is also the most limited. It does not take into account the time value of money, the rate of return that is required by the company, or the savings that may occur after the initial investment is recouped. The most thorough way to evaluate a project and make a decision with the most accurate information possible is to use a combination of the three methods. Using two or all three methods together will give the most accurate information and will provide the company with a complete picture to evaluate potential capital expenditures.
4. Malia
As described by Kenton (2019), "Capital rationing is the act of placing restrictions on the amount of new investments or projects undertaken by a company." ( para 1). Companies use capital rationing to ensure that an investment will yield a greater return for the company when past investments may not have completely met expectations.
Internal Rate of Return, the Net Present Value, and Payback are three of the most common approaches used to decide whether a company should take on a project or not. The payback period is the simplest of the three to compute. It determines how long it will take to get back the money made on the initial investment, however, it does not take into account the time value of money. Many investors use the payback period because it is an easy and simple theory to digest, but they typically supplement their findings with another approach as well.
The internal rate of return stands for how much of a project you expect to be returned to you. The IRR is the discount rate that would equal a NPV of zero (Pinkasovitch, 2019). If the IRR is greater than the cost of capital, you should accept the project and if the IRR is less than the cost of capital, you should reject it (Pinkasovitch, 2019).
Typically the IRR and NPV will produce the same results on whether to accept or reject projects. They also both take into account the time value of money. The NPV determines whether a project will be profitable or not but using discounting post-tax cash flows by weighted average costs (Pinkasovitch, 2019). The NPV is the most accurate approach to use when solving capital budgeting problems because it tells you exactly how profitable one alternative will be as compared to another.
