Understanding Managerial Finance from the Perspective of a Financial Analyst

Write an essay on “Managerial Finance”.
 

The development of this project is based on gathering critical knowledge about the key concepts associated with the managerial finance. The identified aim will be attempted to achieve by analysing two different case scenario where one is based on the investigating the required set of understanding from the perspective of a position of financial analyst, the other is involved with evaluating the expansion project of a specific firm (Baker & Nofsinger, 2012). The definition of managerial finance is related to the acknowledgement about the managerial significance of different financial techniques and conditions of an organization representing a particular industry. It is one of the primary areas of finance focusing more on the assessment skills of the individuals rather than the involving techniques. Therefore, the importance of managerial finance is based on determining the appropriateness of the financial techniques adopted by a firm for developing the understanding whether these are affecting the business internally or externally (Brown, 2012). It can be stated that the basic aim of managerial finance is improving the functionality of the current financial techniques for supporting the achievement of better business outcomes of the company, while preventing the possible occurrence of loss. It is analysed that the approach is the combination of both managerial and corporate financing process. Hence, the major two sections of the document will be dealt with the development of valuable information satisfying the aims and importance of managerial finance.

The information portrayed within this section will be based on the viewpoint of the position known as the assistant financial analyst at “Antipodes Mineral Resources Company (AMR)”. The assessment of four important areas associated with the job role will be done to develop the useful understanding related to the basic financial concepts.

According to the analysis made on the associated trends in the minerals industry, the necessary involvement of different types of mineral investment can be observed by the incident of commodity price booms during 2004 to 2008. This was the longest and strongest price boom in more than fifty years, which apparently burned out in 2008. Later, the scenario had acquired the second wing in the second half of 2009, which triggered an unprecedented wave in terms of the investment from the miners in the new capacity due to the intense interest in commodities stimulated from the investors and governments (Donovan, 2012). On the other hand, the weak and declining rate of the real term prices emerged due to the prolonged period of boom, which took the industry by surprise. Due to the scenario, the share price of different mining corporations or companies became universally depressed leading few number of investment projects for the companies in the pipeline and flippantly staffed in the project development.

Evaluation of a Firm’s Expansion Project

Meanwhile, the scenario leads to a certain trend in the investment projects followed by the minerals and mining companies. These companies shifted their focus in carrying out some heavy investments in the expansion of existing mines as well as on the research and development programs for evaluating the improvement opportunities to the new ones (Doumpos, Zopounidis, & Pardalos, 2012). Considering the certain trend associated with the types of investment pursuing by the minerals companies, it can be stated that the process is highly slow given the nature of the business. Therefore, it can be suggested that the identification of suitable targets for investment is required to be made essentially. The certain process requires the involvement of appropriate feasibility studies, acquisition of permits, community agreements, and the assessment of environmental impacts before the project can be financed adequately (Gapenski, 2012). Apart from that, it is also observed that the quoted minerals companies have the trend to invest in the nonferrous mining and metals, which is driven by the unprecedented level of industry investment caused by the unparalleled high level of prices.

The activities and actions regarding the office of the chief financial officer (CFO) of AMR are highly expected to be developed in line with the certain identified mission. This particular is based on assuring the application of effective management techniques and approaches to maintain the financial integrity of different investment projects and programs including department of energy programs, resources development, and other relevant activities (Gil-Lafuente, 2013). Apart from that, the office of CFO is responsible to develop, implement, and monitor the policies and systems according to the different departments for ensuring the effective outcomes extracted from the key identified areas. These identified areas are the analysis and evaluation of the programs, administering the company budget, resource allocation, strategic planning process, corporate financial systems, internal controls, and managing the accounting and finance division.

Therefore, the identified activities of CFO’s office clearly portray the roles and responsibilities of the CFO within the organization (Gitman & Zutter, 2012). The activities and approaches confirms that the CFO should need to be an effective leader of the organization, as the position of the certain job roles directly represents the key member of the senior management of a company. The office of CFO is expected to develop the activities for facilitating the delivery of services in such a manner satisfying the value creation and preservation within the organization. different procedures undertaken by the CFO’s office and outcomes of such process should need to reflect the shared vision and leadership qualities to not only the organization or its employees, but also to the different other stakeholders at the same time (Gitman et al., 2012). In this particular scenario, it is required to mention that the misconstrued assumption must need to be avoided between the roles played by the CEO and the CFO, as both are the integral part of the organizational leadership. In conclusion, it can be understood that the roles and responsibilities associated with the CFO’s office are developed to form the partnerships with the number of leadership teams and members of the company to produce the common vision related to the organizational performance, challenges, and opportunities (Hallegatte, 2012).

Role of CFO in Maintaining Financial Integrity

As a public company listed in the relevant stock exchange, AMR should need to consider and bear certain goals during the management of the company finances. Out of the many goals, the major three ones can be described as maximising the profit, minimising the company expenses, and capturing the increasing market shares within the respective industry.

Out of the three identified goals, profit maximisation is the most important part of managing the financial aspect of the company (Khaja Safiuddin, 2012). It is the ultimate measure, which supports AMR to determine how profit can be extracted from the major business procedures or from the company revenues.

Apart from the responsibilities played by the owner of the company, AMR as a company operating in the mining and minerals industry of country should need to take accountabilities of several other perspectives as well. One of such accountabilities can be observed by the involving term known as “conflicts minerals”. The certain term is probably unknown to many individuals; however, it is important from the business context of a minerals company (Lu, Jain, & Zhang, 2012). The particular accountability from this identified aspect is related to the compliance of the business activities and proceedings with the complex rules and guidelines developed by the regulatory body of the country. This provides huge burdens for the company like AMR, as the rules and regulations often hamper the performance of the company with the identified industry. Being accountable for such compliance, the company is responsible to develop strategies according to the condition to minimise the implications of “conflict minerals’ (Nolop, 2012).

On the other hand, the company of AMR’s category should also need to consider the supply chain accountabilities importantly. Different kinds of legislations and regulation of the country develop and enforce certain acts to look through the supply chain area of the company. The major aim of this process is to check the inclusion of any metal in the products developed by the company originally belonging from the mines located in the conflict regions (Qureshi, 2012). Therefore, the activities of AMR must need to be informed about the understanding of this certain accountability, giving rise to the approach to amputate the supply of conflict minerals. On the other hand, the company should need to think critically to satisfy the aim of cost minimisation for reducing or cutting off the irrelevant expenses incurring by the business. Therefore, the management should need to conduct review of the financial expenses of the business to decide upon the relevancy and affordability of such expenses critically (Sherman, 2011). As a listed company, AMR should need to retain its business presence to sustain the position, where such process depends not only on the profit earning capacity of the company, but also the cost controlling power of the business management.

Financial Goals of a Public Company

Last but not the least, the company should need to focus on maximising the market share, which can be calculated by the total revenue of the company over a certain period and comparing such with the total revenues achieved by the industry. As a public company listed in the stock exchange, the company needs to maintain the increasing responsibility to expand its shares in the market, in addition to increase the size of appeal to the larger demographics (Skae & Vigario, 2012). 

The initial investment required by RWE Enterprise for developing it second production line is $3 million for purchasing and installing the system to manufacture and sale feed supplements used by the cattle raisers. The estimated life of the new facility is 10 years with the discounting rate is determined as 10%. The after-tax scrap value after the end of the machine life is $200,000. Furthermore, it is assumed that the new production line is required to be refurbished after of five years costing approximately $2 million. Lastly, it is expected by the management of RWE that the new production facility will generate a cash inflow for the business amounting to $700,000 each year of its operating life.

With the help of the particular information, firstly, it is required to discount the cash inflows, which are generated each year by installing the new production line for the company (Watada, 2012). In order discount the cash inflows, the use of a simple formula will be adopted.

P / (1 + i)t; where P = cash inflow, I = discount rate, and t = year/time

Year One: 700000/ (1 + 0.10) x 1 = 636363

Year Two: 700000/ (1 + 0.10) x 2 = 318181

Year Three: 700000/ (1 + 0.10) x3 = 212121

Year Four: 700000/ (1 + 0.10) x 4 = 159090

Year Five: -1300000/ (1 + 0.10) x 5 = – 236363

Year Six: 700000/ (1 + 0.10) x 6 = 106060

Year Seven: 700000/ (1 + 0.10) x 7 = 90909

Year Eight: 700000/ (1 + 0.10) x 8 = 79545

Year Nine: 700000/ (1 + 0.10) x 9 = 70707

Year Ten: 700000/ (1 + 0.10) x 10 = 63636

Therefore, the Net Present Value or NPV for the new production line will be:

[3000000 – (636363 + 318181 + 212121 + 159090 – 236363 + 106060 + 90909 + 79545 + 70707 + 63636] = $1499751

By calculating the NPV, the total value of the new investment project can be determined as $1499751. In general, the NPV with the positive value should need to be selected by the business, because of such investment can be more profitable than investing the money in some other alternatives (Whelan, 2011). Contrary to that, the negative value suggests the rejection of the identified project for the business. In case of RWE Enterprise, NPV calculation reflecting the positive value means that the option of developing the production line should need to be followed and implemented by the company.

Calculation of Payback and Discounted Payback

year	cash flow	cumulative cash flow
0	-3000000	-3000000
1	700000	-2300000
2	700000	-1600000
3	700000	-900000
4	700000	-200000
5	-1300000	-1500000
6	700000	-800000
7	700000	-100000
8	700000	600000
9	700000	1300000
10	900000	2200000

With the help of the table, payback period can be calculated as,

= 7 + (100000/700000)

= 7.14 years

Year	Cash Flow	Net Cash Flow	Discounted Cash Flow	Net Discounted Cash Flow
Year 0	$-3,000,000.00	$-3,000,000.00	$-3,000,000.00	$-3,000,000.00
Year 1	$700,000.00	$-2,300,000.00	$636,363.64	$-2,363,636.36
Year 2	$700,000.00	$-1,600,000.00	$578,512.40	$-1,785,123.97
Year 3	$700,000.00	$-900,000.00	$525,920.36	$-1,259,203.61
Year 4	$700,000.00	$-200,000.00	$478,109.42	$-781,094.19
Year 5	$-1,300,000.00	$-1,500,000.00	$-807,197.72	$-1,588,291.91
Year 6	$700,000.00	$-800,000.00	$395,131.75	$-1,193,160.16
Year 7	$700,000.00	$-100,000.00	$359,210.68	$-833,949.47
Year 8	$700,000.00	$600,000.00	$326,555.17	$-507,394.31
Year 9	$700,000.00	$1,300,000.00	$296,868.33	$-210,525.97
Year 10	$700,000.00	$2,000,000.00	$269,880.30	$59,354.33

With the help of the table, the discounted payback period can be determined as,

[9 + (210525/269880)] = 9.78 years

The decision rule regarding both the payback and discounted payback period suggests the approval of the project in case the calculated of the calculated period is less than the target period. In case of RWE Enterprises, the new production line should need to be implemented to achieve the benefit. Additionally, it is required to mention that the process discounted payback period is more reliable than the simple payback period and the associated calculations. Because of providing priority to the time value of the money, discounted payback period is more widely used technique to achieve the accurate result to make the investment related decisions (Qureshi, 2012). Considering the overall calculations, it is interestingly observed that the project with a negative present value would not pay back the amount of initial investment. 

References

Baker, H. & Nofsinger, J. (2012). Socially responsible finance and investing. Hoboken, N.J.: John Wiley & Sons.

Brown, R. (2012). Private real estate investment. ?: IMOJIM.

Donovan, S. (2012). Study Guide for Principles of Managerial Finance Brief. Boston: Pearson Prentice Hall.

Doumpos, M., Zopounidis, C., & Pardalos, P. (2012). Financial decision making using computational intelligence. New York: Springer.

Gapenski, L. (2012). Healthcare finance. Chicago, Ill.: Health Administration Press.

Gil-Lafuente, A. (2013). Decision making systems in business administration. Singapore: World Scientific.

Gitman, L. & Zutter, C. (2012). Principles of managerial finance. Boston: Pearson Prentice Hall.

Gitman, L., Smith, M., Hall, J., Lowies, B., Marx, J., Strydom, B., & Van der Merwe, A. (2012).Principles of managerial finance. Cape Town: Pearson Education.

Hallegatte, S. (2012). Investment decision making under deep uncertainty. [Washington, D.C.]: World Bank, Sustainable Development Network, Office of the Chief Economist.

Khaja Safiuddin, S. (2012). Managerial Finance and Research. Saarbrücken: LAP LAMBERT Academic Publishing.

Lu, J., Jain, L., & Zhang, G. (2012). Handbook on decision making. Heidelberg: Springer.

Nolop, B. (2012). The essential CFO. Hoboken, N.J.: John Wiley & Sons.

Qureshi, A. (2012). An Evaluation of Financial Practices in investment decision making. Saarbrücken: LAP LAMBERT Academic Publishing.

Sherman, E. (2011). Finance and accounting for nonfinancial managers. [New York]: American Management Association.

Skae, F. & Vigario, F. (2012). Managerial finance. Durban: LexisNexis.

Watada, J. (2012). Intelligent decision technologies. Berlin: Springer.

Whelan, J. (2011). Decision making in a Japanese general trading company.