The components of net cash outlay in capital budgeting decision

The initial investment outlay refers to the incremental cash flows that occurs only at the start of a project's life,CFO. The initial invest includes such cash flows:

1. purchase price of the new asset: This is the purchase price paid for the acquisition of a new fixed asset. Purchase price of the assets increase the cash outflow.

2.Cost of installation and transportation: Installation and transportation costs are added to purchase price of asset to determine depreciable value of an investment.

3.Change in working capital : Working capital may be increased or decreased at the time of investment increase in net working capital increase the amount of initial investment and decrease in net working capital decrease the amount of initial investment.If it is increase in zero year, it has to be treated

Marginal Cost of Capital (MCC)

The MCC is defined as the cost of the last rupee of new capital that the firm raises, the marginal cost rises as more and capital is raised during a given period. A firms marginal cost of also know as weighted marginal cost of WMCC reflects the fact that as the volume of total new financing increase, raising the firms cost of capital. Breaking points, which are found by structure weight, represent the level of total new financing at which the cost of one of the financing components rises, causing an upward shift in the weighted marginal cost of capital. The weighted average cost of capital is the firm WACC associated with its next rupee of total new financing. For the project evulation purpose, the marginal to cost of capital is more relevent then

the weighted average cost of capital .

Du point analysis

The Du point system of analysis is named for the Du point Corporation, which originally popularized its use. It is used by financial managers to dissect the firms financial statements and to assess its financial condition.Du point system merges the income statement and balance sheet into two summary measures profitability, return on total assets and return on equity.

The Du point system links the net profit margin with its total assets turn over.The Du point formula then multiplied these two ratios to find the firms return on assets(ROA):

ROA=NET PROFIT MARGIN* TOTAL ASSETS TURNOVER

Substituting the approriate formulas into the equation and simplifying produce for formula given earlier:
ROA=NET INCOME/SALES*SALES/TOTAL ASSETS

The Du point formula allows the firm to brisk down its return on total assets into profit on sales and an efficiency of assets use component.Typically, a firm which low net profit margin has total assets.

Limiations of financial ratio

The ratio analysis is the important tool of the financial analysis of the any firm. Many people are interested to know about the financial informatics and growth of the firm. For this purpose, they use financial ratios.They can predict the ratio for the future too. Ratio analysis measure the liquidity, efficient , turnover and profitable of the firm.

Most estimates of the predictive power of financial ratios are based on the analyst's past experience with them.

A number of empirical studies have tested for the predictive power of ratios. In most of studies, ratios are used to predict the business failure. Other tested the power of ratios to predict corporate bond rating keeping the dependent variable. Then uses the regression analysis.

The most commonly uses ratios for predictive purpose are debt to equity, cash flow to total debt, profit margin, debt coverage, return on investment.

therefore the ratios analysis has the predictive power of the firm's performance evaluation.

Financial ratio analysis

Financial ratio analysis designed the relative strengths and weakness of business operations. It also provides a framework for financial planning and control. Financial managers need the information provided analysis both on to evaluate the firm's past performance and to map future plans. Financial statement analysis involves a study of the relationship between income statement and balance sheet accounts, how these relationship change over time and how a particular firm compares with other firms in its industry .Although financial analysis has limitations, when used with care and judgment, it can provide some very useful insights into the operations of a company.

There are many types of financial ratios. they are as follows:

1.Liquidity ratio
a. current ratio
b.Quick ratio

2.Assets management ratio
a.Inventory turnover ratio

3.Debt ratio
4.Profitability ratio
5.Market value ratio

Importance of Financial Mangement or managerial finance

Managerial finance is important in all business including banks and other financial institutions, as industrial and retail firms. Its is also important government operations, schools, hospitals and highway departments.

Managerial finance is important for people in marketing, accounting, production, personnel and others areas to understand finance in order to do a good job their own fields.Marketing people , for example, must understand how marketing decisions affects and are affected by funds availability, by inventory levels, by excess plant capacity, and so on. Similarly, accounts must understand how accounting data are used in corporate planning and are viewed by investors.

Now days the important of managerial finance increasing day by day. Failure and deteriorating of many corporations increase the importance of the managerial finance. For example,the failure of Neon Air Limited,deteriorating of performance of the Nepal Bank Limited. etc. Most Of the corporations fail due to the improper financial management. Such type of management arises due to the lack of adequate know edge in financial decision making process.

The importance of managerial finance or financial management can be below:

1. To make investment decision
2. To make capital structure
3. To make dividend decision
4. To make working capital decision
5. To archive certain goal