Capital Investments-Financial Analysis

Capital Investments-Financial Analysis

Part 1

The Inputs, End Results, and the Information that Must be Known

The capital investment decision information, as learned in the course, can be applied to real-life projects. Such methods include the payback method and the net present value method. For my case, I will adopt the use of the Net Present Value (NPV) method to evaluate the viability of an intended project. The NPV method requires various inputs for the intended project. The inputs include the number of years that the investment is expected to last, the amount of cash expected to be committed to the investment, the amount of cash expected to be raised from the investment yearly, and the cost of capital expressed as a percentage. Essentially, information relating to these inputs had to be available for my recent investment. While using the NPV method, all the cash is converted to the present-day value using a discount factor of the cost of capital percentage. All the cash outflows from the investment are summed up and expressed in their present value using the present value discount factor. Further, the total cash inflows from the project are expressed in their present value using the discount factor and summed up to a total present value cash inflow.

After obtaining the inputs described above, the project’s net present value can be calculated. It is obtained as the difference between the total cash outflows and total cash inflows. A net present value decision criteria are then consulted to assess whether the investment is viable. Notably, the decision rationale entails accepting investments with a positive net present value because a positive net present value indicates the investment is profitable (Xu, 2022). If the net present value is established to be a negative figure, then the project is rejected for being unprofitable. The NPV method is credited for discounting the cash flows to their present value as a measure to take into account the money’s time value. The time value of money notes that the value of money at present is more than its value on a future date. Further, the method is credited for taking into account all the cash inflows raised from the investment, making it better than the payback method. Essentially, this adds weight to the adoption of the method for my recent investment.

Assumptions and Expected Standards

For an effective NPV method, various assumptions have to be considered. First, it is assumed that the economic condition in the areas of investment will remain stable throughout the investment. Such conditions include a stable rate of inflation, no market-disrupting pandemics will occur, and the government policy on such investment will remain the same. A change in any of these aspects can adversely influence the outcome of the NPV method as compared to the actual outcomes. Second, it is assumed that the adopted discount rate, considering the cost of capital, is realistic in line with the existing market conditions. However, this is not always the case, as the discount rate is difficult to calculate and determine with certainty. When the two assumptions based on a stable economic situation are taken, the investment will meet my expected standards. Notably, this means that the result of the NPV calculation will be true and reliable in order to inform further investment decisions. For instance, if the NPV calculations for my project indicate a negative value, investing in the project will be stopped without a doubt.

Part II

The information acquired from the course regarding financial analysis can be applied in real-life regarding investment in manufacturing firms. Specifically, I would concentrate on the apparel manufacturing industry. The selection for the industry is informed by the knowledge I have regarding the industry and my intention to operate in the industry in the future. For an investment to be made in the manufacturing firms, the industry performance will be assessed. Further, the specific firms I would consider investing in will be evaluated based on the knowledge obtained from financial analysis. Information from their financial statements will be primarily used in making investment decisions. Notably, this is so because the information drawn from the financial statements can be used to calculate various financial ratios that offer insight into the financial health and market performance of the institutions. Such ratios offer insight into various aspects such as profitability, market price, solvency, liquidity, and gearing positions of manufacturing firms.

Profitability and price ratios will stand out to be the most significant metrics for my research. Profitability ratios offer insight into a company’s performance regarding the ability to generate profits from its operations, while price ratios offer insight into the market performance of a firm in the stock markets (Kimmel et al., 2020). Examples of profitability ratios to be considered include the gross profit margin, net profit margin, and return on investment (ROI). On the other hand, examples of price ratios for consideration include the price-earnings ratio, dividend yield ratio, and return on equity ratio. The ratios identified will play a part in deciding on the specific apparel industry firms to invest investment. The firms to be selected should be performing well in the industry based on the price and profitability ratios. Notably, this will be determined by comparing the values of the profitability ratios of the firms with industry averages. The firms selected from investment should have better price and profitability ratios than the industry averages.

Another decision mechanism to be considered will entail comparing the performance of the firms across various periods. Essentially, this will offer insight into whether the financial performance of the companies is improving or declining. Firms with an improving trend in price and profitability ratios in the past three years will be the most appropriate for making investments. As highlighted in the discussion, price, and profitability will be the primary basis for evaluating the financial performance of the apparel industry firms required for investment. The probability will not be used as a measure of choosing firms because they can be ranked based on performance established from ratio analysis.

Other factors will be considered when making a decision to invest. They include industry prospects for growth and government policies. The apparel industry was significantly disrupted during the COVID-19 pandemic, which significantly reduced the performance of the firms within the industry. Taking this into account when evaluating the firms for investment will be crucial to ensure that objective financial analysis is done and firms with the greatest potential are selected. Further, considering government policies is important in understanding the future of the manufacturing sector selected. Policies that do not support growth in the sector, such as high taxation, can reduce the benefits to be obtained from the industry (Boisjoly et al., 2020). Thus, investment should be made in the sector when favorable government policies are made. Overall, information relating to financial analysis, as obtained from the course, is crucial in making investment decisions for any given industry, and regular re-visits will be made for a better understanding of the concepts.

References

Boisjoly, R. P., Conine Jr, T. E., & McDonald IV, M. B. (2020). Working capital management:

Financial and valuation impacts. Journal of Business Research, 108, 1-8.

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2020). Financial accounting: tools for business decision-making. John Wiley & Sons.

Xu, J. (2022, December). Advantages and Disadvantages of Dividend Discount Model and Better Alternatives. In 2022 International Conference on Mathematical Statistics and Economic Analysis (MSEA 2022) (pp. 456-461). Atlantis Press.

ORDER A PLAGIARISM-FREE PAPER HERE

We’ll write everything from scratch

---

Unit VIII Journal
Assignment Content

Your final journal submission will consist of two parts. Reflect on what you have learned in the previous units and then answer the following questions.

Part I

After reading more about capital investment decisions in this course, you decide to apply one of the methods, such as the payback method, to a recent investment you made. Walk through the inputs and the end result. What information would be known? What would you base those assumptions on? Would the investment meet your standards? Explain.

Part II

After reading about financial analysis in this course, you decide to put your newfound knowledge to work and consider investing in a few manufacturing firms. What industry would you look at first? What ratios would stand out as the most significant for your research? What would your final choices depend on? Would they depend on product, price, or probability? Explain your response.

Your journal should be at least two pages in length. Adhere to APA Style when creating citations and references for this assignment. APA formatting, however, is not necessary.