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Myra Ltd., manufacturing televisions, is planning to expand its business and requires Rs 250 crore for the same. A number of projects are available to the company to invest in and each project has to be evaluated carefully. The Finance Manager of the company, has assessed the projects in terms of the rate of return from each project and wanted to select the one with the higher rate of retum. But, before selecting the project he has to take into consideration other factors also.
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Question : 18
Total: 18
Explain two other factors that the Finance Manager should consider before selecting the project
Solution:
As Myra Ltd is looking for financing one of the projects with the highest rate of return, the other factors considered for capital budgeting include the following:
(i) Cash flows of the project - The finance manager should expect a regular cash flow through its investments to meet the day-to-day requirements of their operations. To determine expected cash flow from huge investments on the project, the finance manager will consider factors associated with the nature of the industry, taxation, policy and regulatory structures, political and social stability, etc.
(ii) Investment criteria - The finance manager should consider availability of raw materials, labour, etc, along with the extent of risks and uncertainties associated with the selected project as well as the future earning capacity of the project. Investment criteria should be based on suitable and reasonable factors as long-term investment decisions are irreversible and cannot be unchanged.
(i) Cash flows of the project - The finance manager should expect a regular cash flow through its investments to meet the day-to-day requirements of their operations. To determine expected cash flow from huge investments on the project, the finance manager will consider factors associated with the nature of the industry, taxation, policy and regulatory structures, political and social stability, etc.
(ii) Investment criteria - The finance manager should consider availability of raw materials, labour, etc, along with the extent of risks and uncertainties associated with the selected project as well as the future earning capacity of the project. Investment criteria should be based on suitable and reasonable factors as long-term investment decisions are irreversible and cannot be unchanged.
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