As5ignment-3
Quei: Explain in detail the workiy
Capital Natore and Scope, also
explain fattors oßlecting borking
Capib)
Ansi Wor King cabiYl is a fonda menb)
phys d crucid
Anancial Concept that
day -to-day operatns
role in the
ol a business. 9 represents the capial
O4 funds au dilable for he short-tern,
day - tocay Rinancial oþerations of a
Con sny , which ihclodes Couering its
opertional erþensey ying short
tetm debts, and funding the þradluctoy
o qoods or seruit es.
# Natore of Working Capitel
. Short-term Nure workig calpifal s
pimirily Concerned
oith short- term finncal needs, tyhially
within a one-year period. 9t ensure
that a business can meet its mmediate
obligatons dhd operste Shoohly
2Circolatng Cabital :> or king cabitsl Coimpris
CUrrent assets ahd
Current liabliies . CUrrent assets include
Cash , qcoonts recevable, and inuentory
which Cdh be Conuert ed into CAsh
withm a short time rame.
3- Dynamic >» ne level ol workig
capital Qluchstes båsed
on the business Cycle ahd opertbre
reqpirements .9 shoold be managed
elicienty to strike d balane befueen
excess and in soßicient or leig
Cabll
#Scde o Working (abilel 22
1 Core (omponents 3 Working capital
maragement encomassA
(omþonents,
the management o uavious ceivable
incloding Cash aCounts re
in ventorg and actoonts þayoble
2. Liqpidity and Proßiability 82 9t involues
belancing
cash b
liquidihy (hauing enough
neet short -term obligati'ons nd
prolibbility (maimi~ing returns on
còþital) An excess of worKing Cabial
may lead to louer proßi tabl iy whle
a shorage càn hmder oþerations,
3 Risk Manqqement 9 t ficient oor king
captal mahagement
helhs mi i gate finànal risks by
Cnsorinq the busness Can resþond to
Unexpeted erponses or revenue
gurtostions.
4 Shraiegc Decision- Making ) 9t plys
role in strateg ic decisions Such as
bricing credit þolicrs,invenbrg
management,ànd suppliet relatonshilps.
#factoxs AFfecting working Aptal 9
1- Nahore ndosry 7 Dierent industie
have varyng
wor king caplel neds. for exemple,
manugacturing comþanies may reyire
More invertorg while service-basel
busneas es may have lawer inue ntory
repirements
2- Business Seasorality > Sessons|
busineSS es
exþerience Pluctu ations in working
Cil needs due to vring demsnd
thraognout the year.
3 (edit polcy 2> The tams oered to
CUstomets (tedit periadsy
Credlit limits Jimba ct actount re ceivable
- dnd conseyenty | wor king cabral
4Sopplier Terms 5The credit terms
negotiated with
Sopliers allect acroonts þayable dnd
Can imbact oorking capital þositioel
or negathuely.
5- Economic (ondifions :> Eonomic
kactors he
inßlati on interest rates yand eon omic
Cycles Can ingloence orki'ng Calpital
reapi re ments
6 EPficiencH of Oherah ong > Effiient
mahaqement faster
inventory
cllettion oß atount
recejveble, and the abilty to delay
accounts þayable can opimi,e
working apiel
7- Girawtn end xþoience Expandin
d business
o7ten reqyires mor woY kng coital
to soport increa sed operations.
in detail the Capital -
Que 217 Eocplain
decislons and the
Budg eting
various Methods tike Pay bàck
AkR, NPV) IRR2
Ans 2> Cptal budgeting decIsions inuolue
valusting and sdecing long-tem
invest ment projects or cael expendito re
that will allect a lompsny's financial
peror mance ouer dn extended þeriod
Ohe o the most imþorant tasks in
Calptal budgeting is estimati ng foYe
Cash Flous for àa \oroject.The Anal
decision we make at the end c
Hhe cabital budgehng praeSs is Cash
better than the accurecg o our
Aow esti mates
Capital Budgeti ng
Techniques
Traditional Methcd Discountd (ash
>Payback Plow Hetnod s
Period ’Net Rresent
’Accooning
Rate oß
Return
Value
mternal
Ràte o
Return
>Arolitability
1 Payback Period ((PBPl;
5he Poyback period is the time iH
takes for d project to qenerdte
eno vgh cash faws to recover its
0nitial investment oY py backD the
inihal Capital outlay
A shorter paybc k pericd is qenerally
bre lerred y às it indi cates a quicker
recovery o the inuestmernt. Prajects with
Shorter payback þeriods are considered
less risky
Lini taions g> Pay back pevicd daes not
Cosider the time yalue of
money and it ignores cash flows
ee OEUTif oCUring ater the bay bar
perlod.
Calculations;? a) s annual net cash
inlouws are even or
(onstant,
Paybeck berid = Oriqna) inuastment
Annyal Cash -inflow
b) 92 cash inlows are Uneen
Lohere,P- serds for fayback perice,
E= no c&
o yesrs inmdiatelg pre ceding the
yer o finsl recoverg.
B= he balance amount still to the
recovered.
C= Cash flaw during the year oß final
recovevy
2- Acountng Rate o7ketorn (ARR1
’ ARR metsuTes the þralitiaoiliy an
investment by comring the aeYage
annual accaontng proßit to the inital
Investment.
A higher ARR is þrelerred, as it it
signies a higher retorn on investment,
touw ever, ARR does not consider the
|tne value o money and focoses Solely
on acounting Prolit
(alcolathons > Averge Annual Earning
dfter depr eci ahon fares Xlo
Auerge investnent
3. Net Present Value (NP
7 NPV Is a Comproensive methocl thit
Considers he time velue oß money 9+
Ca lculates the present Vlue f ex þecte
fotore cash flows (both inflows and
outflos) assiated uth an Inuestment
project
A bositi ve Pv indicates thet the
praj ect is expected to gener ate
more Cash theh the inihal inuesment
making t a favorable inyetment
The higher the NpN, the better the
/nvestnent opportunity
NPU Onsiders the time value
money ànd þrou ides a clesr meàsure
ol proßitability 9t allows for the
(omparison o mutua llg excdosi ve projet
Calculations
Not Present = esent Value olnet
Yalve Cash inlows - Tobl
net inihal
nuestpne nt
7Ac ept or Reject (ritena'
Accept the
(proposai
iR up < Zero Reject the
Roposd|
(ltr
Pu (Annuiy= +2 +3t
t-i (ltry
= Cash fows (PIA Rate 7-tie
where P= Rresent Ualue oßthe asset at time
3ero
q=expected Cash ftow at the end
oß Peniod t
r= Discount rate or requiYred rate
o return on the Cásh flous
n= Expected ife an asset.
PVIFA= Present Valve of nterest fector r
An nutg
4 Snternal Rate o Return (TRRJ
’ TRR is the discount rate at which
the ol d þrojet
30 other LOOrds ) it isthe rate
ob retorn that eQusteg the present
Value o cash inßleus to the Present
Valve l caah outflouws.
n investment is deemed aceptable ß
itf TRR is eqpal to or qreater thsn
the regpired ratemore
oß retorn. The higher
attractive the
the TRR) the
0nuestme nt.
Cscolations
Discounted = Dlscount el
Som Som
inQlowso oß outtious
Rresent aloe (P)= C t - tt
