Financial Management

INTRODUCTION

I feel very much delighted while submit this assignment for financial management. The most important part of the assignment is forecasting project finance and analyzing the project feasibility. Annual report calculation with comments are very important to this assignment those are prepared myself properly other task also completed by referring books and internet. Before calculating the project feasibility we have to consider some techniques of the forecasting. Now a days some computer software have been used for calculate financial thing. It is the most popular method in western countries. In our country still not started to measure with the software because of technology but some construction companies have started. Western countries have developed in technology. Forecasting and analyzing the project is very significant for project and company.

Financial Management

Introduction for Pike Electric Corporation (my downloaded company).

Name: Address: -

TREX Company 160 Exeter, Dr. Winchester, 22603, United States

Telephone: - 540-542-6300

Fax

: - 540-542-8739

Web: -

www.trexcompany.com

Trex Company is all decked out with plenty of places to go. The company makes woodalternative products, which are used to construct residential and commercial decks, rails, fences, and trims. The Trex Wood-Polymer composite is made of waste wood fibers and reclaimed plastic such as grocery bags and film. Its products resemble wood and have the workability of wood, but require less long-term maintenance. Products are available in traditional lumber sizes. The company sells mainly to professional installation contractors and the do-it-yourself market through about 90 wholesale distribution centers, which in turn sell to retailers, including The Home Depot and Lowe's across the US and Canada. Name: - Fletcher Building Construction company Address: - Fletcher Building Limited 810 Great South Road Penrose 1061 Private Bag 92 114 Auckland 1142, New Zealand Telephone: -+64 9 525 9000

Financial Management

Company Description Fletchers history began in 1909 with the construction of a timber weatherboard house in Dunedin, New Zealand. Over the following 70 years, Fletcher grew into a respected Australasian building products and construction company. In 1981, the merger of Fletcher Holdings, Challenge Corporation and Tasman Pulp and Paper created Fletcher Challenge, a multi-national corporation with construction, forestry, building, and energy businesses. During 2000 and 2001 Fletcher Challenge sold the Paper and Energy divisions, and established separate companies focused on the remaining sectors. Fletcher Building was formed to manage the businesses at the heart of the Fletcher tradition the manufacture and distribution of building products and construction materials, and the construction of commercial, residential and infrastructure developments. In March 2001, Fletcher Building listed on the NZX and ASX.

Financial Management

TASK:-1

Explain the principles of working capital management of Fletcher Building Construction Company Ltd. 01. You may calculate the working capital of each year & cash conversion cycle in days. Working Capital Management At the starting point of the project, the working capital should be budgeted and it will be companied with actual working capital, achieved a maintain at last day of the project

Working capital = Current assets Current liabilities

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory), Also known as "net working capital". If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations, so if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Financial Management

Current Assets

It represents the operating liquidity is available to construction work. It is necessary to purchase the current assets of a construction work and fund the payment of current liabilities.

Current assets are important to Construction Company because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. Firms may have fixed assets which are long-term assets, plant, machinery and equipment, but they will also have assets which can be realized (cashed-in) in the short-term. This is generally taken in accounting terms to be less than a year. The current assets are therefore ones that can be quickly realized and change frequently. There are several kinds of current assets in the construction company such as Closing stocks Debtors bank Cash in hand

Current Liabilities These are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities. It may be in the form of creditors or firms who have sold you goods which you have not yet paid for, or it may be money borrowed from a financial institution loans or overdrafts. Those liabilities are owed in the short-term. This is generally taken in accounting terms to be less than a year. Short-term liabilities thus tend to be trade creditors and short-term borrowing such as overdrafts. There are several kinds of current liabilities in the construction company Creditors Accruals Bank over draft

Financial Management

The amount of working capital

TREX Company Year Current assets (-) current liabilities Working capital Sales/construction revenue 2008 116,354 (51,269) 65,085 329,194 2009 106,571 (45,926) 60,645 272,286

Comment Since the company had decreased its sales up to $272,286 in the year 2009 it is better for them to reduced working capital also to $ 60,645 as appropriately. Fletcher Building Construction Company year Current assets (-) current liabilities Working capital Sales/construction revenue 6,799,000 7,103,000 2009 2,317,000 1,384,000 933,000 2010 2,255,000 1,313,000 942,000

Comment Since the company had decreased its sales up to $7,103,000 in the year 2010 working capital also $942,000 as appropriately.

Financial Management

General comment When we are compare the working capital concept Fletcher Building Construction Company better than the Trex Company in the last year. Because Fletcher Building Construction Company is good in the 2010, they improved their working capital according to the increases the sales revenue, in such case Trex Company in a good position in the previous year. They have good sales revenue, but working capital performance is decrease in the 2009. Thats why their working capital is decreases. So they should be increase the size of sales. If consider these thinks they will be get the good working capital.

Cash conversion cycle In management, most of the companies are calculating the cash conversion cycle because of their effective cash management. The cash conversion cycle attempts to measure the amount of time each net input dollar is tied up in the construction and interim bills process before it is converted into cash through bills to client. Thus, the cash conversion cycle measures how risky it would be to increase this investment with suppliers in the course of expanding customer sales. However, shortening the cash conversion cycle creates its own risks. Usually a company acquires inventory on credit, which results in accounts payable. A company can also sell products on credit, which results in accounts receivable. Cash, therefore, is not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and cash recovery. This cycle is extremely important for retailers and similar businesses. This measure illustrates how quickly a company can convert its products into cash through sales.

Financial Management

General comment When we are comparing the inventory conversion period, Fletcher Building Construction Company is better than the TREX Company. Therefore that company owners should be gets the payments from the clients quickly. If that company used the purchase materials in the long time, they spent more storage, security and other necessary expenses. So other expenses also high, this is bad. TREXCompany decrease 18days of Inventory Conversion Period of 2008-2009. But Fletcher Building Construction Company decrease the 8 days Inventory Conversion Period of 2009-2010. Therefore Fletcher Building Construction Company is better than the TREX Company TREX Company with the Inventory Conversion Period comparison. In this moment both companies in a good performance for the Inventory Conversion Period.

2. Receivable Collection Period / Debtors collection period. Which is the average length of time required to convert the firms receivable into cash that is to collect the cash following a credit sale. Equation for R.C.P

TREX Company

year

2008

2009

Financial Management Debtors/receivable Sales revenue Receivable collection period 13,555 329,194 15days 31,429 272,286 42days

Comments The clients had taken 42days to settle its bills. In the year 2009 the debtors collection period had increased so that it will not be favourablely affect the working capital

Fletcher Building Construction Company year Debtors/receivable Sales revenue Receivable collection period 2009 1,114,000 6,799,000 60days 2010 1,112,000 7,103,000 58days

Comment The clients had taken 58days to settle its bills in the year of 2010 the debtors collection period had decreased so that it will not be favourablely affect the working capital General comment When we are comparing the receivable period, it shall be high is better for the Fletcher Building Construction Company If the company gets the money from the client in the minimum period, they do the balance work and can invest the other business. So they will get more benefits.

Financial Management When we consider the TREX Company, is a bad performance for the receivable period. Because this period is increasing the year 2008 to 2009 so its bad for this company. In such case Fletcher Building Construction Company in a good position of this receivable period.

3. Creditors Payment Period (C.P.P)/ Payment period. This is the average length of time between the purchases of materials and labors the payment of cash for them. Equation for C.P.P C.P.P = x 365

TREX Company year Account payable Cost of sale/ revenue Creditors payment period 2008 15,427 240,170 24days 2009 16,514 191,339 32days

Comments In the year 2009 the contractor/ company had taken 32days to settle their accounts to creditors. Since the year 2009 the company had increased the creditors period up to 32days it will be favorably affect to the working capital.

Fletcher Building Construction Company

Financial Management year Account payable Cost of sale/ revenue Creditors payment period 2009 1,116,000 5,141,000 80days 2010 996,000 5,442,000 67days

Comments In the year 2010 the contractor/ company had taken 67days to settle their accounts to creditors. Since the year 2010 the company had decreased the creditors period up to 67days it will be favorably affect to the working capital

General comment When we are comparing the receivable period, it shall be high is better for the Fletcher Building Construction Company. Therefore they get more advantages for these long credits period. But TREX Company is not in finance good position. Because they have shot credits period so when we are comparing of credits period Fletcher Building Construction Company is better than the TREX Company according to the Credits period calculation.

TREX Company year Inventory conversion period Debtors collection period Creditors payment period Cash Conversion Cycle 2008 105days 15days (24days) 96days 2009 87days 42days (32days) 97days

Comments

Financial Management The increased in the C.C.C up 97days in the year 2009 shows high length of C.C.C so that it is not better for working capital

Fletcher Building Construction Company year Inventory conversion period Debtors collection period Creditors payment period Cash Conversion Cycle Comment The increased in the C.C.C up 61 days in the year 2010 high length of C.C.C so that it is not better for working capital 2009 78days 60days (80days) 58days 2010 70days 58days (67days) 61days

General comment When we are comparing the cash conversion cycle, TREX Companys C.C.C is high level. So this is bad performance for Company. Fletcher Building Construction Company has C.C.C shall be low is good for company. Therefore Fletcher Building Construction Company is better for the TREX Company according to the C.C.C.

Relaxed working capital policy It is one in which relatively large amount of cash & inventories are carried, sales are stimulated by the use of credit policy that provides liberal finance to client & corresponding high level of receivables. & where a company does not take advantage of credit provide by

Financial Management material suppliers. Relatively large amounts of cash and marketable securities and inventories are carried and sales are stimulated by a liberal credit policy that results in a high level of receivables.

Restricted working capital policies The holding of cash, inventories & receivables are minimized. & accruals & payable are minimized. Under the restricted policy, working capital is turned over more frequently, so each dollar / pound / Qatari riyal of working capital is forced to work hard. Holdings of cash and marketable securities and inventories are minimized. Short term working capital policies Most businesses experience seasonal cyclical fluctuation. For example, construction companies have peak in spring & summer, relatively peak around Christmas, & the manufactures who supplies both construction companies & retailers follow similar pattern. Similarly, virtually all businesses must built net operating working capital (NOWC) when the company is strong, but they then sell all inventories & reduce the receivables when the economy slack-off, still NOWC, rarely drop to zero-companies have some permanent capital NOWC, which is the NOWC on hand at the low pint of the cycle. Then, as sales as sales increase during, the upswing, NOWC must be increased & the additional NOWC as define as the temporary NOWC. The manner in which the permanent & temporary NOWC are financed is called the firms short term financing policies. 1) Maturity matching or self-liquidating approach This strategy minimizes the risk that the firm will be unable pay off its maturing obligations. A financing policy that matches asset and liability maturities This would be considered a moderate current asset financing policy Policy

Financial Management Permanent current assets + Fixed assets = Equity + Long term liability Temporary current assets = Current liability

2) Aggressive Approach A policy in which all of the fixed assets of a firm are financed with long-term capital, but some of the firms permanent current assets are financed with short-term non-spontaneous sources of finances. Policy Part of the permanent current assets + Fixed assets = Equity + Long term liability Temporary current assets + Part of the permanent current assets = Current liability 3) Conservative Approach A policy in which all of the fixed assets, all of the permanent current assets, and some of the temporary current assets of a firm are financed with long-term capital. Policy Part of the permanent current assets + Fixed assets = Equity + Long term liability Temporary current assets + Part of the permanent current assets = Current liability + Long term liability

Financial Management

Task 02
Prepare a Cash flow forecast & cash flow Statement. Note: You may use the following techniques before marking the final conclusion for Fletcher Building for past two years. Accounting rate of Return. Payback. Net Present Value. Intemal Rate of Return.

Cash flow Forecast The Cash Flow Forecast is the most important aspect of any company. A firm needs to plan its cash flow carefully, and this should be in the form of a cash flow forecast. This will set out all incoming cash from any form and when it is coming in, and all outgoing cash and when it is going. The Construction companies may have alternative or optional projects to be invested as follows Stating new project as a main contractor Act as a sub contractor to a main contractor Incurring cost for to develop new products Finance are a limiting factor to any of the construction company, it will be evaluated the projects feasibility by using investment appraisal techniques. Investment Appraisal Techniques Investment Appraisal Techniques means of assessing whether an investment project is worthwhile or not. Investment project could be the purchase of an important materials for a construction company, a new piece of equipment in a manufacturing plant, a whole, etc. these techniques are Used in both public and private sector.

Financial Management Accounting rate of return

This is one accounting method and it is used for comparison. It is an internal method for selecting the projects. It can also be used to measure the performance of projects and subsidiaries within an organization. ARR is based on numbers that include non-cash items. The accounting rate of return is conceptually similar to payback period. The accounting rate of return is a very simple rate of return: average profit/average investment as a percentage.

Payback period
The Payback Period is perhaps the simplest method of looking at one or more investment projects or ideas. The Payback Period method focuses on recovering the cost of investments. The Payback Period represents the amount of time that it takes for a capital budgeting project to recover its initial cost. It always was cash flows to the calculation of payback period.

Net Present Value (NPV) The present value states that an investment should be adopted only if the present value of the cash flow it generates in the future exceeds its cost, that is, if it has a positive net present value Net present value is the net benefit that accrues to firm from adopting the investment.

Internal Rate of Return (IRR) An internal rate of return is the rate we expect to earn on an investment project. The Internal rate of return is that rate which discounts a projects cash flow to a net present value of zero. The internal rate of return method requires that if a particular investment is either to be accepted or rejected. It should be accepted if its internal rate of return exceeds the cost of capital. The rationale is that if an investment earns more than the cost of funds used to finance, it should be adopted. There are two methods available for calculation of the IRR; Formula method of IRR Graphical method of IRR

Financial Management Decision Rule/ Criteria IRR > COC IRR < COC Accept Reject

Prepare cash flow forecast and cash flow statement 1) Accounting Rate of Return(ARR) TREX Company Year 2008 (Yr 01) 2009 (Yr 02) 2010 (Yr 03) 2011 (Yr 04) 2012 (Yr- 05) Net profit + 7,534 16,444 17,550 19,450 20,542 + + + + + Depreciation 25,876 24,485 25,245 26,600 27,412 = = = = = = Net cash flow 33,410 40,929 42,795 46050 47954

Note: Last three years figures were assumed. ARR = Avg. Net profits x 100 Initial outlay = 16,304 137,828 = 11.82 % x 100

Comment: In the TREX Company, when investment is $100, average net profit is $11.82. Companys percentage of ARR is positive. So, this company earns good profit. As a result this is good for the companys future.

Financial Management Fletcher Building Construction Ltd Year 2009 (Year -1) 2010 (Year -2) 2011 (Year -3) 2012 (Year -4) 2013 (Year -5) Net profit + $ (46,000) + $ 272,000 + $ 320,000 + $ 270,000 + $ 415,000 + Depreciation $ 129,000 $ 198,000 $ 330,000 $ 470,000 $ 240,000 = Net cash flow = = = = = $ 83,000 $ 470,000 $ 650,000 $ 740,000 $ 655,000

Note: Last three years figures were assumed. ARR = Avg. Net profits x 100 Initial outlay = 2,462,000 x 100 2,984,000 = 8.25% Comment: In the Fletcher Building Construction Ltd, when investment is $100, average net profit is $8.25. Companys percentage of ARR is positive. So, this company earns good profit. As a result this is good for the companys future. General Comment: Once we compare between TREX and Fletcher, TREX ARR is greater than Fletcher. When TREX invests $100, it can earn net profit of $11.88, at the same time Fletcher invest $100 and earned net profit of $8.25. Form these analyzing we can decide TREX financial position is better than Fletcher.

Financial Management 2) Payback period TREX company Year 0 2008 2009 2010 2011 2012 Net cash flow (256,459) 40,350 50,120 70,450 75,400 80,480 Cumulative cash flow (256,459) 216,109 165,989 95,539 20,139 60341

Payback period time is more than 5years. Comment: In TREX, they return their investment after 5 years from their date of investment.

Fletcher Building Construction Limited Year 0 2009 2010 2011 2012 2013 Payback period is more than 5 year Comment: In Fletcher Building Construction Limited, they return their investment after 5 years from their date of investment. Net cash flow (2,984,000) 83,000 470,000 650,000 740,000 655,000 Cumulative cash flow (2,984,000) (2,901,000) (2,431,000) (1,781,000) (1,041,000) (386,000)

Financial Management General comment: Once we compare with TREX and Fletcher, both companies return their investment within 5years, therefore they have to wait long period to return their investment. Therefore both companies situations are bad. 3) Net Present Value (NPV) Note: Cost of capital is assumed as 6 %. D.C.F = 1/ (1 + r) n r =Cost of capital n =nth year DCF at 6%

Years DCF

0 ( )

1 ( )

2 ( )

3 ( )

4 ( )

5 ( )

= 1.0

= 0.94

= 0.89

= 0.84

= 0.79

= 0.75

TREX Year 0 2008 2009 2010 2011 2012 Net cash flow (256,459) 40,350 50,120 70,450 75,400 80,480 D.C.F at 6% 1 0.94 0.89 0.84 0.79 0.75 Discounted cash flow (256,459) 37929 44607 59178 59566 60360 NPV= 253842.60

Comment: In this company, NPV is in positive figure. Therefore company project is well.

Financial Management Fletcher Building Construction Limited Year 0 2009 2010 2011 2012 2013 Net Cash flow $ (2,984,000) $ 83,000 $ 470,000 $ 650,000 $ 740,000 $ 655,000 D.C.F at 6% 1 0.94 0.89 0.84 0.79 0.75 Discounted Cash flow (2,984,000) 78020 418300 546000 584600 491250 NPV = (866430) Comment: In this company, NPV is in Negative figure. Therefore company project is not feasible. General comment: Once we compare TREX and Fletcher, TREX companies NPV are in positive figure. But Fletcher Company NPV is negative. So TREX Company is good.

4) Internal Rate of Return (IRR) Note: Assumed cost of capital is 14 %

TREX Year flow 0 2008 2009 2010 2011 2012 (256,459) 40,350 50,120 70,450 75,400 80,480 1 0.88 0.77 0.68 0.59 0.52 (256,459) 35,508 38,592.40 47,906 44,486 41,849.60 Net cash flow D.C.F at 14% Discounted cash

NPV = 48,117

Financial Management Cost of capital 6% 14%

253,842.60

48,117

IRR = r1 + [NPVr2

x (r2 - r1)]

NPVr1- NPVr2 = 6% + [48,117 205725.6 = 6+ [384936] 205725.6 = 6 + 1.87 = 7.87% Comment: TREX Incs IRR is grate than cost of capital. Therefore company project is good feasible. IRR < COC 7.87% < 6% accept Fletcher Building Construction Ltd Year 0 2009 2010 2011 2012 2013 Net Cash flow (2,984,000) 83,000 470,000 650,000 740,000 655,000 D.C.F at 14% 1 0.88 0.77 0.68 0.59 0.52 Discounted Cash flow (2,984,000) 73040 361900 442000 436600 340600 NPV = (1329860) x (14-6)]

Financial Management Cost of capital 6% - 866430 IRR = r1 + NPVr1 NPVr1 - NPVr2 = 6% + - 866430 x (14% - 6%) 14% -1,329860 x (r1 - r2)

- 866430 (-1329860)

= 6% - 14.95%

= -8.95%

Comment: In Fletcher Inc companys IRR is less than cost of capital. Therefore company project is not a feasible. IRR < Cost of capital -8.95% < 6% rejected

General comment: Once we compare TREX Inc and Fletcher Ltd, TREX company IRR than is grate than cost of capital. But Fletcher Companys IRR is less than cost of capital. Therefore TREX Incs project is more feasible than the Fletcher Ltd. Summary: Analytical Techniques ARR TREX 11.82 % Fletcher 8.25 % Comment TREX Inc net profit is better than Fletcher Ltd when they invest $100.

Financial Management Payback period 05years 05 Years Both companies have to wait for a long time to return their investment. NPV 253842.60 -8664300 TREX companies projects are feasible IRR 7.87% (-8.95) % TREX Inc is better than the Fletcher Ltd.

When compare both companies TREX company is best.