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Net Present Value

Net Present Value
Understanding Net Present Value One method of deciding or not a firm should accept an investment project is to determine the net present value of the project. The net present value (NPV) of a project is equal to the present value of the expected stream of net cash flows from the project, discounted at the firm’s cost of capital, minus the initial cost of the project. The value of the firm will increase if the NPV of the project is positive and decline if the NPV is negative. Thus, the firm should undertake the project if the net present value is positive and reject proposals whose values are negative. This method is considered the best, as it takes into account, the initial investment, and cost of capital and cash inflow over a period. Estimation of Future Cash Flow: One of the most important and difficult aspects of capital budgeting is the estimation of the net cash flow from the project. It is the difference between cash receipts and cash payments over the life of a project. Projected cash flow statement is an important criterion for banks to decide on sanctioning medium and long-term loans to prospective clients. Since cash receipts and expenditures occur in the future, a great deal of uncertainty is involved in their estimation. Some general guidelines are to be followed while estimating cash flows. First; cash flows should be measured on an incremental basis. That is, measurement of the firm’s cash flows with and without the project must be ascertained. Any increase in expenditure or reduction in the receipts of other divisions of the firm resulting from the adoption of a given project must be considered. Effect of Depreciation: Second thing is that, net cash inflow must be estimated on an after-tax basis, using the firm’s marginal tax rate.Third, as a non-cash expense, depreciation affects the firm’s cash flow only through its effect on taxes. The initial investment to add a new product line may include the cost of purchasing and installing new equipment, reorganizing the firm’s production process, providing additional working capital for inventory and accounts receivable and so on. The monetary flows generated by this kind of investment include, the incremental sales revenue form the project, salvage value of the equipment at the end of its economic life, if any and recovery of working capital at the end of the project. The outflow will be in the form of taxes, fixed costs and incremental variable costs. Internal Rate of Return or IRR: Another method of determining the acceptance rate of a project proposal is internal rate of return method (IRR).This is nothing but the discount rate that equates the present value of the net cash flow from the project to the initial cost of the project. The firm should undertake a project if the IRR on the project exceeds or is equal to the marginal cost of capital. Capital Rationing and Pay Back Period: More techniques are available for evaluating the feasibility of investment proposals, like, capital rationing, profitability index, pay back period and others. It is always a good thing to analyze the rate of return on investment before the start of the project. If it happens to be satisfactory, then the firm can take a step forward to finalize the proposal. The cost of capital climbs up when the investment return declines, and the firm is subjected to undue pressures of mounting interest rates and capital depletions....
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Line and Staff Relationship

Line and Staff Relationship
A Purview on Line and Staff Relationship HOW TO MAKE LINE AND STAFF WORK EFFECTIVELY: Line people “TELL” but staff people “SELL”: The functions of line and staff often overlap and it is the responsibility of line authorities to make decisions and act upon them while staff must assist and counsel them. If the role playing is perfect all the other elements fall into place. Making Line listen to Staff: The line men must be made to understand that the company employs staff experts to assist and advice and it is not fair to undermine them. Keep the Staff informed: It is a must to keep the staff members abreast of the vital matters in order to make correct decisions. Requiring Completed Staff work: 1. Presentation of a clear recommendation based upon full consideration of a problem 2. Clearance with persons affected 3. Suggestion about avoiding difficulties involved 4. Preparation of paper work-letters, directions, job descriptions and specifications are the functions that should be carried out by the staff members on time in order to facilitate the line managers to accept or reject a proposal. Making Staff work as a Way of Life: The duty of staff is not to take credit but downgrade their own contributions. This results in EGO SATISFACTION and also a drive to improve the performance levels. Careless Application of the Staff Device: The staff should not take authority in their own hands though they may be anxious to know about the implementation of their suggestions. How to Influence Without Authority ADVANTAGES OF STAFF:  a) The staff specialists save much time by gathering, analyzing and interpreting the data while line managers are busy at work.  b) Complex problems of line men require advice of staff men.  c) Staff advice is necessary for technical, political, legal and social decisions. LIMITATIONS OF STAFF: a) Thinking in Vacuum: Sometimes highly impractical solutions are suggested by the staff men due to lack of experience in implementation. b) Lack of Staff Responsibility: They can easily blame the line manager for the failure of a project since they are not accountable for the end results c) Danger of Undermining the Line Authority: When the top management attaches too much importance to the staff fraternity, there is a danger of staff managers looking down on the line managers d) Problem of Unity of Command: Sometimes the lower level employees will be getting instructions from both the line and staff authorities. Have you ever experienced such conflicts with your managers or colleagues? If so, feel free to discuss about the situation and how you tackled it in the comment section...
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