Simmulation Summary

Simulation Summary

When a company decides it is time to implement a new product or make an expansion they have to think about the choice in their profit they are making. The financial manager will try to find the best course of action to take by determining different variables throughout the project. The financial manager will use the net present value and the internal rate of return to help figure out these variables.

The other criteria that the financial manager would need to now would be things like the cost of capital. This would include the debt to equity percentages. The cost of capital is determined by taking the amount of money put into a project against the amount of money gained from the project after subtracting all the investments. The financial manager will look at things like sales projections, depreciation, net present value, and cost of capital to make their decisions. These are the main areas that will be affected by a new project or a new product.

The net present value has slight disadvantages because it is done on a discounted rate. This could lead the company into losing money if they are only basing their decision on the highest net present value compared to the internal rate of return and the cost of capital. The financial manager would need to ensure the demand is still being met, while using the lowest internal rate and cost of capital.

The cost of capital and the net present value will help decide whatever is being mauled over by the financial manager. If the company has to borrow more money to fund this new project the interest rate on that loan could have an effect on the decision being made. The more the project is going to cost the less likely the company will want to do it. The financial manager also has to look at the owners standpoint of the decision it is their money that is at stake here. The goal is to make their money back by the end of the project.