Accounting management on: NPV decision
Q?? Apart from the decision of Board of Directors and Chairman there are other factors which can affect the NPV decision.
Solution: The main factors are there which affects the net present value such as receipt and rate of interest. It can be observed that larger the discount rate shows the lower present value of an expense at a prescribed time.
It is observed that many projects results in overheads like support of computer services. It is important for the company to assess the impact of overhead on the project that this cost is significant or not. It can be observed that overhead cost effects the estimation of NPV.
It is observed that financing a project results in extra cash flows to managers and investors. The best method is to calculate the finance cost and include that cost in discount rate of interest because discount rate plays an important role while estimating NPV.
Depreciation and Working capital
It is observed that depreciation plays a very important role in capital assets while calculating NPV. Companies are required to calculate depreciation two times for the estimation of cash flows. It can be observed that Companies generally deduct the depreciation for calculation of taxes on project revenues and again add back to get cash flows. Agrimass Company had purchased building of 4500000 with useful lives of 5 years and 20% of its original cost was salvage value according to straight line method depreciation came out to be 720000.
It is observed that working capital also plays an important role in calculation of cash flows because facilities of new production require higher inventories and salaries payable. It is necessary for companies to take the change in working capital related with the project. It can be observed that in Agrimass change in working capital arose two times which takes into consideration for the calculation of outflows and inflows. While calculating outflows working capital treated as expenditure and working capital realize at the end of the year treated as revenue during estimation of inflows.
The advantages and disadvantages to shareholders if the Agrimass PLC Company is taken over by New Build PC.
The various benefits are available to shareholders if company is taken over by some other company such as tax revenue, increase in revenue and reduction of cost of capital (Guaghan , 1991)
It is observed that if the company is taken over by some other company then it generates value generation for shareholders. If Agrimass is taken over by New Build PC then it would increase the value of the shareholder in Agrimass. It is observed by the analyst that value of shareholders after mergers and acquisitions would be greater than summation of shareholders value of parent companies. If Agrimass is taken over by New build PC then it help shareholders in achieving cost efficiency.
It is observed that if Agrimass is taken over by new build PC then it helps the managers of the Agrimass to have benefits and incentives from shareholders wealth.
It can be concluded if Agrimass is taken over by New build PC then it would help in generation of taxation gain and enhancement in revenue to shareholders. If two agricultural firms merge then it would provide more value to shareholders of companies.
It is observed that if Agrimass is taken over by new build PC, then stock price of the Agrimass will increase on the other hand the stock of New Build PC Company will remain the same. At last, it increases the value of the shareholders.
It is observed that if new build PC take over the Agrimass then it would increase the net worth of shareholders.
It is observed by the researcher that one of the major takeover objectives is to improve shareholder value. Hence, financial parameters assume lot of importance in any takeover exercise. It can be concluded that if Agrimass is taken over by new build PC then it would increase the Operating Margin & Volume Growth, Asset/Resource productivity and decrease the cost of capital and risk which ultimately helps in increasing the value of shareholder
Disadvantages to shareholders
It is observed that after the takeover clashes of culture took place between shareholders which can reduce the efficiency of the Company.
It is observed that culture clashes took place after the takeover make unbearable environment for shareholders.
It is analyzed that after the takeover it is difficult for shareholders to make decisions for survival of business.
It is analyzed that sometimes takeover results in increased cost of capital which ultimately effects the net worth of shareholders.
It is observed that managers of the Agrimass would have more benefits and incentives at the expense of the shareholders.
The importance of non-financial factors in contributing to the success of a merger
It can be analyzed that apart from the financial factors various non financial factors are there which contributes to the success of the merger (Auerbach, 1998)
Corporate culture The corporate culture of target companies help the acquirer company what corporate culture should be follow in order to achieve integration.
Regulatory and anticompetitive factors – These factors helps companies to know how simple they will gain from acceptance of the merger. These factors help acquirer companies to know what can be the regulatory problems due to market size and aggressive positioning.
Management – The management of the company plays a very important role in success of the merger because it helps companies to know their weakest and strongest part in their team of management.
Corporate governance – The corporate governance help acquirer companies after the merger to know their corporate governance with target companies.
Markets – Markets plays a very important role in success of the merger because it helps acquirer companies to know possible synergies of target companies in the market.
Image and marketing – Image and marketing help acquirer companies to know risks and benefits attached with the merger.
Organizational fit –This feature help the acquirer companies to know are they able to fit with structure of target companies or not.
Personnel – Personnel help acquirer companies to know how many employees would be continuing after the merger.
Technology – This feature would help the acquirer companies to know that their systems are able to manage increased products and transactions. And if acquirer companies are not able to manage the increased products and transactions then they calculate risks associated with system integration.
Integration risks – This factor help companies to know the risks of the combination which can be resulted in the upcoming time.
Financial and other assets go through periods of boom and bust. There are unstable upward movements generating unsustainable prices, which may persist for many years, followed by a crash
It can be analyzed that financial crisis took place two decades followed a same series of events which are characterized by boom and bust. According to the researchers the sub prime crisis in the real estate sector was not an exception to this pattern of crisis (Bardham & Jaffee, 1997)
The boom phase
It is observed that the surplus liquidity conditions create an efficient demand for certain assets by estimating an approximate rise in assets.
It is observed by the financial analysts that rise in assets prices results in surplus liquidity in the monetary system.
It is observed by the financial analyst that rise in price of assets will increase the large wealth and the motive for increased consumption and expansion of credit. According to the monetarist economist it is necessary to know the relationship between the money stock and asset prices to know the condition of boom and bust.
According to the economist Tim Congdon he argued that the boom and busts take place in assets due to fluctuations in broad money. According to him broad money not only includes demand and cash deposits but also includes a broad range of small term claims imposed on banks.
It can be analyzed that the role of non bank monetary institutions is to fix a ratio of holdings of money as a ratio of total wealth in the portfolio. It is observed that when there is an increase in the money stock of insurance companies then they try to hold less money in other assets. Insurance companies come out of money and bid the price for other categories of assets (Bernanke, 1995)
In the case of recent crisis the rise in properties of real estate took place from low to peak during the time 1997-2006.It can be seen that the speculation are not restricted to only real estate properties but they had also included debts to rising markets and long term bonds as in the situation of investment debacle and technology stocks as in the situation of dotcom bubble. During the period of boom, the market place of debts, derivative instruments and NASDAQ shows the functioning of stocks of technology with a rise of 400%.
After the period of boom current financial crisis are featured by a stage of distress. Following the boom period financial crisis episodes are characterized by a phase of distress. Distress subjects to the rising awareness about prices of assets and in order to know that the asset regarded as a thing of speculation and is featured by quick reduction in its prices. These all reasons lead to huge loss in bank and financial sectors as the things of speculation that treated as collateral to other assets.
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