Financial management and risk analysis Essay Example | Topics and Well Written Essays - 2000 words

Financial management and risk analysis - Essay Example The new assembly cell requires three cell programmer/operators recruited at a salary of  £20,000 per year each. The cell robots are expected to last for 5 years, after which they can be sold off for an estimated price of  £1,000 each. The company’s cost of capital is currently 10%. This is a two-option financial investment appraisal case which compares the cost of operating an existing sub-assembly line with the cost of a new automated assembly cell. Both options incur costs we could compare to find out which option results in lower expenses over the next five years. Any savings will increase profits, which we can then transform into additional value that would benefit our shareholders. We utilised common investment criteria to analyse this project, and considered other factors that may affect its financial viability. We included our suggested solutions and potential effects on the final decision through a sensitivity analysis, which takes into account: 1. The cost of replacing our eight fitters and with three skilled operators. We included the effect of granting separation pay to each displaced operator and made a recommendation on how much we could afford to pay. The key insight to our problem is to match the cash flows for both options. Option 1 is our existing sub-assembly line, whilst Option 2 would be our proposed investment in new automated machines. Each option has a cash outflow over the next five years. Whilst Option 1 would not require a large cash outflow now, it has the same level of cash flows we are currently spending to maintain the line. In contrast, Option 2 demands a large cash outflow now, but this would result in lower cash flows over the next five years. We compared both cash flow forecasts and arrived at a net cash flow, which is the amount of working capital we would save from the lower cash requirements of Option 2. A basic assumption is that the sub-assembly line’s productivity would be constant, and that