Financial Management

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Table of content:

1. Introduction to Financial management. 2. Investment Decision. 3. Financing Decision. 4. Time Value of Money.

1. Introduction to Financial management.

!at is financial management"

It deals #it! t!e Financial Decisions suc! as #!en to introduce a ne# $roduct% #!en to invest in ne# assets% #!en to re$lace e&isting assets% #!en to borro# from ban'% #!en to e&tend credit to a customer% and !o# muc! cas! to maintain. 1. Investment Decision. 2. Financing decision.

2. Investment Decision.

T!e follo#ing are t!e features of investment decision: T!e e&c!ange of current funds for t!e future benefits. T!e funds are invested in long term assets. T!e future benefits #ill occur to t!e firm over a series of years.

Im$ortance of investment decision: T!ey influence firms gro#t! in long run. T!ey effect t!e ris' of t!e firm. T!ey involve commitment of large amount of funds. T!ey are among t!e most difficult decisions to ma'e.

Ty$es of investment: (&$ansion of e&isting business. (&$ansion of ne# business. )e$lacement and moderni*ation.

Investment (valuation: +ay ,ac': It is one of t!e most $o$ular and #idely recogni*ed traditional met!od. -. .onstant annual cas! flo#. /. 0ne1ual cas! flo#.

.onstant annual cas! flo#:

(&am$le: 2 $ro3ect re1uires an investment of )s -4%444 and gives annual cas! flo# of )s 12%-44 for 5 years. T!e $aybac' $eriod for t!e $ro3ect is: +,6 initial investment7 annual cas! flo# +,6 )s8-44447 12-4496 4 years

2. 0ne1ual cas! flo#. In case of une1ual cas! flo#s% t!e $aybac' $eriod can be calculated by adding u$ cas! inflo#s until total is e1ual to t!e initial investment.

0ne1ual cas! flo#: (&am$le

2 $ro3ect re1uires a cas! outlay of )s 24%444% and generates cas! outflo# of )s :444% )s 5444% )s 4444 and )s 3444 during t!e ne&t 4 years. !at is t!e $ro3ects $aybac'" 2ns#er: 3 years ; 814447 34449< 12 mont!s 6 3 years and 4 mont!s.

+ractice e&ercise:
1. 2 $ro3ect re1uires an investment of )s 5-%444 and gives annual cas! flo# of )s 1-%444 for 14 years. .alculate t!e $aybac' $eriod. 2. 2 $ro3ect re1uires a cas! outlay of )s -4%444% and generates cas! outflo# of )s :444% )s 12444% )s 1/444% )s 1-444 and )s 15444 during t!e ne&t 4 years. .alculate t!e $aybac' $eriod.

+ractice e&ercise: 2ns#ers

1. +,6 initial investment7 annual cas! flo# +,6 )s85-4447 1-44496 - years. 2. 2ns#er: 3 years ; 8144447 1-4449< 12 mont!s 6 3 years and 11.2 mont!s.

3. Financing decision
Fe# 1uestions t!at must be as'ed in financing decision= 3. !at is t!e ty$e of financing" 4. !at is t!e best financing mi& 8> of debt ? e1uity9" -. If debt t!en #!at is t!e structure of received and $ayment" /. @o# and #!en to a$$roac!" 5. @o# t!e funds be $!ysically ac1uired"

4. Time value of money

)u$ee received today is #ort! more t!an a )u$ee received in t!e future. T!ree reasons may be attributed to individuals time $reference to moneyA 5. )is'. :. +reference of consum$tion. B. Investment o$$ortunity.