Evaluation of net working capital, Financial Accounting

Assignment Help:

Q. Evaluation of Net working capital?

The evaluation presumes that several key variables will remain constant such as the inflation rates, discount rate and the taxation rate. In reality this is improbable. The taxation rate is the matter of government policy as well as so may change due to political or economic necessity. Particular inflation rates are difficult to predict for more than a short distance into the future and in practice are found to be constantly changing. The range of inflation rates utilize in the evaluation is questionable since over time one would expect the rates to converge. Given the improbability of future inflation rates using a single average inflation rate might well be preferable to using specific inflation rates. The discount rate is probable to change as the company's capital structure changes.

For instance issuing debentures with an interest rate of 9% is probable to decrease the average cost of capital. Glance at the incremental fixed production costs it seems odd that nominal fixed production costs continue to increase even when sales are falling. It as well seems odd that incremental fixed production costs remain constant in real terms when production volumes are changing. It is likely that some of these fixed production costs are stepped, in which case they must decrease.

The predicts of sales volume seem to be too precise predicting as they do the growth maturity and decline phases of the product life-cycle. In practice it is probable that improvements or redesign could extend the life of the two products beyond five years. The supposition of constant product mix seems unrealistic as the products are substitutes as well as it is possible that one will be relatively more successful. The sales price has been increase in line with inflation but a lower sales price could be used in the decline stage to encourage sales.

Net working capital is to stay constant in nominal terms. In fact the level of working capital will depend on the value of goods, the working capital policies of the company, the credit offered to customers, the credit taken from suppliers etc. It is improbable that the constant real value will be maintained. The net present value is greatly dependent on the terminal value derived from the sale of fixed assets after five years. It is improbable that this value will be achieved in practice. It is as well possible that the machinery can be used to produce other products rather than be used solely to produce Alpha and Beta.


Related Discussions:- Evaluation of net working capital

Illustrate the changing face of accounting, Illustrate the changing face of...

Illustrate the changing face of accounting Over past 25 years, environment within which businesses operate has become increasingly turbulent and competitive. Numerous reasons h

Minority interest-group accounts, Minority interest (MI) When the holding...

Minority interest (MI) When the holding company owns less than 100% of the ordinary share capital of the subsidiary company then the other balance is held by minority interest. T

With the ddm formula calculated growth rate, Using CAPM's formula, Retur...

Using CAPM's formula, Return on equity = Risk-free rate + Beta*(Expected market return - risk-free rate) With the given information, Return on equity = 1% + 1.7*(9% - 1%)

What amount did spear receive from the bond issurance?, On July 1, 2010, Sp...

On July 1, 2010, Spear Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2010 and mature on April 1, 2020. Interest is payable sem

Prepare mehring''s statement of cash flows, The following information is av...

The following information is available for Mehring Corporation for the year ended December 31, 2012: Collection of principal on long-term loan to a supplier

Calculate infant mortality rate, Q. Calculate infant mortality rate? Mid...

Q. Calculate infant mortality rate? Mid year population 440000 Late fatal death          29 No. of live birth           5200 No. of infant death      423 No. of mate

Pre-acquisition dividends, Pre-acquisition dividends Pre-acquisition di...

Pre-acquisition dividends Pre-acquisition dividends may also arise in the following situations; 1 ) Where the holding company acquires the subsidiary company’s shares cum-div

Cst , how to account cst collected

how to account cst collected

What is the financial objective of a business, What is the financial object...

What is the financial objective of a business A business is created to enhance wealth of its owners. This may come as a surprise, as there are other objectives which a business

Executive, Ask question #EM201683STE718FACMinimum 100 words accepted#

Ask question #EM201683STE718FACMinimum 100 words accepted#

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd