The Importance Of Financial Analysis - 1000 Words

The financial analysis has been done and on the basis of NPV and IRR projections we accept the project because NPV is positive at 15% nominal rate of return and the IRR is 64% without Anna’s concerns and IRR is 51% with regard to her concerns. So, we accept the project because in both the situations, the project seems acceptable and profitable. Annual Net present value with IRR or not in sheet 1 is positive, which shows that it is a good idea to continue the project due to the net cash flows are made positive by an increase in the value of sales. Annual net present value in sheet 3 is also positive which we have created with Anna’s concerns where she felt she needed the new equipment to be used by the new product sales only and the NPV†¦show more content†¦In Austrochemicals the techniques that also should be used is profitability index, discounted payback period and return on assets. Furthermore, the preliminary expenses such as research, overseas trips and legal expenses are part of sunk cost so these should not be included in the project because they are preliminary expenses that are for the six years from the accountants point of view. Building modifications has to be done in a way that can improve the substantial life of the building. Incentives to boost the contract manufacturing sales they can pay to existing and new customers who are companies to utilise the spare capacity of the machine. The Payback period method has disadvantages such as ignoring the time value of money, ignoring cash flows beyond the payback period (ignoring the profitability of a project), risk and opportunity cost. Payback period also doesn’t specify any required comparison to other investments or even to not making an investment. The internal rate of return has limitations such as not being an investment decision tool to rate mutually exclusive projects but only for deciding if a single project is worth investing in. Internal rate of return overestimates the yearly equivalent rate of return for a project whose interim cash flows are reinvested at a rate lower than the calculated IRR. IRR doesn’t consider cost of capital, it should not be used to compare projects of different duration. IRR may haveShow MoreRelatedImportance of Financial Analysis692 Words   |  3 PagesFinancial analysis is an important aspect in maintaining a successful business. Analysis, when done properly allows a company to better pinpoint problem aspects of the business. The company can then take corrective action to alleviate or mitigate the problem aspects of the business. Aspects such as return on assets, return on equity, net income, and the quick ratio are all aspects needed to help the business function properly. 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