Financal Management Essay Example | Topics and Well Written Essays - 2500 words

Financal Management - Essay Example A project should be accepted if the NPV is positive, otherwise it should be rejected. Internal Rate of Return (IRR) - It is the sum total of cash inflows after discounting, which is equal to the discounted rate of cash out flows. The IRR technique is crucial for taking the capital investment decision. A particular project should accept IRR, only if it is greater than Cut-off rate, otherwise such project should be rejected. In case of Wandering Lights Limited, it is better to adopt NPV method rather than IRR method, because while assessing the financial viability, technical feasibility, and taking the appropriate capital budgeting decision of Wandering Lights Limited, it is suitable to undertake NPV as the capital budgeting decision. Wandering Lights Ltd has decided to launch a new product in the market. The product is garden lights. For the production of the new product the company has to introduce new plant and machinery in the business. The estimated cost of the plant and machinery is â‚ ¤3375000. In order to install the new plant and machinery the company additional fund has to be brought into the company as the capital is not sufficient to install the new facility. Wandering lights have two options before them to finance their project. Either they can issue new share or it can borrow funds. Borrowing is the method in which the company borrows fund from any institutions or banks as loans upon an agreement to pay interest at a fixed rate. Borrowings also may be in the form of different securities issued by the company. The companies have different methods for borrowing money. â€Å"There are two main methods by which a company can borrow money: (1) by issuing fixed-income (debt) securities – like bonds, notes, bills and corporate papers – and (2) by taking out a loan at a bank or lending institution.† (When companies borrow money. 2007). Wandering lights can depend on either of the following methods for financing the new project. Most