Plastics Cash Flow

In: Business and Management

Submitted By cmapavycole1992
Words 4554
Pages 19
UWA Plastics evaluates its capital expenditure proposals by classifying a proposal under one of four categories, namely: new product or market, product or market extension, engineering efficiency and lastly safety or environment. If a proposal falls into one of the first three categories listed it must satisfy a number of performance hurdles in order to be considered a viable option. Any proposal that does not satisfy at least three of the four hurdles will not be considered by senior management. If, however, the project does satisfy at least three out of the four performance based hurdles the project’s initiators can submit it to senior management for consideration. Although the capital evaluation scheme is relatively complicated it does, however, allow and ensure that the projects that are being considered by senior management are of a feasible nature. Time is money in business and by ensuring that valuable management time and attention is only focused on proposals that meet a required minimum standard management and therefore the firm as a whole will operate more effectively. Earnings-per-share (EPS) is a firm’s net income divided by the total number of shares outstanding. Shareholders who invest in the company do so in the hope of earning a return on their investment. If the firm is not generating a positive earning per share shareholders and prospective investors are less likely to be involved with the firm. Ensuring a project has a positive impact on the earnings per share over its entire economic life is therefore critical. Payback is the number of years necessary for free cash flow of a project to amortize the initial project outlay. The specified time period for which payback is to be completed by is six years. The payback rule is reasonably simple and has a number of pitfalls in practise because it ignores the project’s cost of capital and time value of…...

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