Corporate Financial Theory

Instructions to writer: These rules should be followed or paper wouldn’t be accepted/returned for revision.
Writer must know how to use the following programs: (Excel, Charts (power point))
1.    Paragraph Limitation:
•    Each paragraph must not exceed 6-7 lines.
i.    Note: Introduction can’t exceed 2 paragraphs as well.
•    Font: New roman
•    Size: 12
•    Spacing: Double Spaced
•    Referencing: Harvard Referencing
2.    Referencing:
•    Referencing must not be “in- progress”.
•    Max 12 Reference
3.    Plagiarism:
•    Must not exceed 6%
•    Information must not be Re-cycled from other online sources or (identical) previous work. “re-phrased”
4.    Table and Charts:
•    Must be provided for every Approach, Section B (1,2,3) and Section C
i.    Section B: Charts must be analyzed to further improve explanation.
ii.    Section C: Overall Chart (line/Better) that Indicates which approach is better and in what terms, Linking it to previous ones (Section B); Compare and contrast
5.    Sub-Heading:
•    Every Sections must be provided with a sub-heading to indicate what that essay will talk about;
i.    for example; In section B-B1; heading for:
1.    NPV
2.    Calculation giving a real Scenario example
3.    Choose the best within...
4.    Why is it the best
a.    (Compare & contrast)
6.    Construction of the essay:
•    Using these 3 approaches (NPV, Payback method, IRR) to determine the best method in 3 different scenarios.
•    Create a table (excel) Scenario: Must be 3 different scenario.
i.    Will be provided Picture: See attachment
1.    Note: Choose different numbers from that picture, due to be being a copy from someplace.
2.    Compare Section B: 1,2,3
•    Section C: Compare and contrast critical analysis
Essay Assignment:
Explain the theoretical rationale for the NPV (Net Present Value) approach to investment appraisal and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches.
3000 words
Extra guidelines:
1.    Within the introduction, introduce the different methods (all of them), then say that you will pick the 3 forms, NPV, IRR, payback method.

2.    “Example – calculation” & “Choose the best”?

a.    This is for the Scenarios, that you will ‘come-up with’. Provide 3 to 4 with different numbers. Rates, amount etc.
i.    Remember that these scenarios (3-4); should be implemented for all approaches
ii.    I would like to see a graph for each, since it has different ways to calculations, including a line or better graph for section C to show the comparison. With more gain, risk, or borrow etc.
3.    Referencing
a.    I would like you to use these ‘some’ of these references from these books,
4.    Critical
a.    I believe that critical writing should be in section C, hence that everything is basic descriptive.
i.    Also try linking them, would be better if it was let say…..
1.    “ Company X, adapting investment one … “
The essential text book for this course is:
Hillier, D. et al., Corporate Finance, European edition, 2013, McGraw-Hill Irwin (customized textbook).
There are some alternatives:
1.    Berk, J. and DeMarzo, P., Fundamentals of Corporate Finance, 3e, PEARSON, 2014.

2.    Ross, Stephen A., Randolph W. Westerfield, Jeffrey F. Jaffe, and Bradford D. Jordan, Modern Financial Management, McGraw-Hill, 2008.

3.    Arnold, G., Corporate Financial Management, PEARSON, 2012.

4.    Brealey, R. and Myers, S., Principles of Corporate Finance, McGraw-Hill, 2012.

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NPV, IRR and Payback Period

Executive summary

The report’s purpose is to provide an analysis of cooperate financial theory, and the constructs relevant and existing in the speculation of issuance and investment management (Baker & Powell, 2005). A variety of issues that are critical are associated with cooperate financial theory. The report defines, analysis and evaluates the issues and their significance to financial theories, marketing and management in relation to design of investment portfolios, and business acquisition process of an investment plan. Once the reference terms are inculcated, the paper provides a conceptual flow. The conceptual flow aims at analyzing how businesses perceive and manage the expectations of their customers and investors (Cam Merritt, 2015). An organization’s ability to incorporate and streamline its policies to meet the expectations of the customers is essential to the success of an investment plan. Furthermore, an evaluation is done on the design of the investment plan and the customer as a function to create a potential investment portfolio to attract investors. Management of customers enhances and stabilizes organizational experience in the market. The stability is essential to the success of the business (Baker & Powell, 2005). On the other hand, management of capital assets in the business increases potential investors in the business. Therefore, it is inherent to balance the two extremes to guarantee the success of the business.

Introduction

The world today is filled with many investment opportunities. These investments promise good returns in the future but the returns only come after a considerable amount of funds is injected in them. For this reason, investors are usually keen to know which investments will give them higher returns and also in what period of time (SIDDAIAH, 2009). Investments that take long to repay the amounts injected to them are usually not favoured because as time passes, inflation may occur reducing the purchasing power of money invested. This would be a loss to the investors. In some instances, a number of investing opportunities may present themselves all at once. For this reason, investors always compare the investments and settle on the one with the highest returns.

To make informed decisions on the best investment opportunities, investors use accounting ratios. These ratios give a clear picture of when an investor is due to receive returns as well a guiding them to the best projects to invest their money into (Baker & Powell, 2005). This paper will focus on three ratios; payback period, net present value and internal rate of return for investment appraisal purposes.

NetPresent Value

Net Present Value or NPV is used to compare the amount of funds invested to the present value of future returns to be received from the investment in question. The amount of funds invested is put side by side to the future returns after discounting by a given rate of return (SIDDAIAH, 2009).  This is a good way of knowing whether a project is worth investing in. A project with a positive net present value is always given a go ahead since it shows that the initial capital will be recovered unlike one with a negative net present value.

The use of net present value to appraise projects has some advantages. One advantage of using NPV is that it puts time value of money in consideration. This method uses the principle that money today is worth more than tomorrow, it therefore changes future cash flows to today’s value (SIDDAIAH, 2009).. This is useful when comparing investments with diverse cash flow patterns.

This method seeks to maximize the worth of a company. It does this by advising company owners which projects to invest in by showing them that a project with a higher NPV is worth investing in. As such, company owners make informed decisions on good projects sine they will maximize profits in them.

Example of NPV

An investor wants to invest in a project that has an initial investment of $240,000 with the following cash flows and a cost of capital of 9%

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