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Financial Risk

Student’s Name

Institutional Affiliate

Date

Introduction

Financial risk is the ability of the company coming up with ways on how they will manage the resources of the company uniformly. The key thing with this is the fact that it helps the company to be accountable and it also helps in organization of the company. It will therefore help in coming with better calculations of what is needed within the company and how the company will determine the cost of its daily activities.

Question one

The assessment of NPV worth by IRR financial calculator for each project A, B, C when the discounted values are 11% and 16% (Beasley, Myers & Allen, 2020).

When looking at project A, at 11%

When looking at B for 11%

When looking at project C 11%

When looking at project A 16%

Looking at project B at 16%

When looking at project C at 16%

Project

C0

C1

C2

C3

C4

NPV @ 11%

NPV @ 16%

A

$ (5,000)

$ 1,000

$ 1,000

$ 3,000

0

($1093.90)

($1,472.80)

B

$ (1,000)

0

$ 1,000

$ 2,000

$ 3,000

$3,250.20

$2,681.35

C

$ (5,000)

$ 1,000

$ 1,000

$ 3,000

$ 5,000

$2,199.75

$1,288.66

In this case it can be stated that we got unrestricted access to finance, and when it comes to project C as well as B are also appropriate at the rates of 11% and also 16%. It can also be pointed out the fact that can not take Project A into account since it the NPV value is negative (Sertsios, 2020).

Question two

As calculated at 11 percent for all NPVs in projects, we find that Project B cash flow is better than all NPVs. Project B is the better alternative with reduced resource access at 11%.

Question three

In accordance with Solution 1 calculations for IRR NPV calculations, for the following projects C, B and A we find the following IRR values.

Project

C0

C1

C2

C3

C4

IRR

A

$ (5,000)

$ 1,000

$ 1,000

$ 3,000

0

0%

B

$ (1,000)

0

$ 1,000

$ 2,000

$ 3,000

76%

C

$ (5,000)

$ 1,000

$ 1,000

$ 3,000

$ 5,000

25%

Ideally, developers always prefer ventures with a higher IRR valuation than the capital expense. Therefore, the decision in this situation is the same as with the NPV. Projects B and C are selected (Korsmo & Myers, 2018).

Question four

The project’s payback period can be stated to be

Project A

Initial investment (-$5,000)

Cumulative cash flow

Year 1

1,000

1,000

Year 2

1,000

2,000

Year 3

3,000

5,000

Year 4

0

5,000

The period will be for three years

The payback for project B

Project B

Initial investment (-$1,000)

Cumulative cash flow

Year 1

0

0

Year 2

1,000

1,000

Year 3

2,000

3,000

Year 4

3,000

6,000

It will be for a period for 2 years

Project C payback

Project A

Initial investment (-$5,000)

Cumulative cashflow

Year 1

1,000

1,000

Year 2

1,000

2,000

Year 3

3,000

5,000

Year 4

5,000

10,000

It will take place for 3 years

It is key to note the fact that when the reimbursement will take place for the project B then it will take place for two years as well as that of proceed C and A that will take place for a period of three years. the best thing in this case is to choose project B by considering the above calculations. The other thing is to look at the payback and the decision that has been generated in regards to NPV.

Question five

Index profitability= future cash flows or present value

Any investor would like to see potential cash flow PV exceed its original cost of investment. The profitability index could also still be higher than 1. Otherwise… The NPV was estimated for each project at an expense of 11 percent of the capital in solution 1. On the basis of these NPV values, the profitability index is as follows for each project:

Project

C0

C1

C2

C3

C4

Profitability Index

A

$ (5,000.00)

$ 1,000.00

$ 1,000.00

$ 3,000.00

0

0.2

B

$ (1,000.00)

0

$ 1,000.00

$ 2,000.00

$ 3,000.00

3.2

C

$ (5,000.00)

$ 1,000.00

$ 1,000.00

$ 3,000.00

$ 5,000.00

0.4

The profitability index of Project B is greater than 1. Decisions focused on the profitability index are also in line with NPV decisions.

Question six

The “Net Present Value (NPV)” metric will be the most widely agreed formula to pick among the programs. It is used for conducting different purposes such as coming up with better decisions when someone is conducting an evaluation of money, but also to determine the desired project and the amount of value-added proposal that it is intended for the investor. NPV is defined as “the net present value and is the difference in the current value of cash inflows and cash outflows” for an organization or a company for a certain time. In other terms, it is the benefit achieved as project expenses are deducted from revenue received (revenues) (Beasley, Myers & Allen, 2020).

Another approach known as the Return Investment Rate that will be used when get to come up with the budget of the money. The objective that is meant in this case is to come up with the right estimation of the income produced by initial investments as a percentage (percent) (Farag, & Johan, 2021).

Conclusion

From the above, it can be pointed out the fact that the company is in a better position to come up with better decisions on how they will operate. The key thing that needs to consider is how the company will accomplish its project without having any difficult. The financial risk helps in determine how the project will push through the whole period.

References

Beasley, R., Myers, S., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw Hill

How alternative finance informs central themes in corporate finance. Journal of Corporate Finance, 67, 101879.

Korsmo, C., & Myers, M. (2018). The Flawed Corporate Finance of Dell and DFC Global. Emory LJ, 68, 221.

Sertsios, G. (2020). Corporate finance, industrial organization, and organizational economics. Journal of Corporate Finance, 64, 101680.

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