Additional Cash Flow That An Organization †Myassignmenthelp.Com

Question: Discuss About The Additional Cash Flow That An Organization? Answer: Introducation Incremental cash flow is the additional cash flow that an organization earns whenever they undertake a new project. If the incremental cash flow is positive it means that the company will earn more cash with the acceptance of the new project. Incremental cash flow can be calculated by deducting the net income from the net expenses and on the basis of that the cash flow can be decided. The cash will flow will be calculated over a specific period of time and it also helps in making comparison between two projects. Three concepts that help in understanding how to calculate the incremental cash flow for a project are- Discounting models of capital budgeting like net present value and internal rate of return that helps in comparing the initial investment of the project with the incremental cash flow or terminal cash flow to judge whether or not to accept the project. Other concepts include non discounting models such as pay back periods where the face value of the incremental cash flow and initial investment are compared with each other. Capital Budgeting is based on the concept of incremental cash flow and all the solutions are based on the same. JIT inventory management is a strategy by which the companies try to reduce the wastage and increase the efficiency by receiving goods only when they are needed in the production process. It helps in reducing the overall cost that the company incurs in the inventory process(Crosby Henneberry, 2016). It also requires forecasting the overall demand of the company accurately. It is highly scalable and has a lot of advantages in comparison with the traditional inventory management. One type of cost that can be minimized with the help of this type of system is the total inventory cost that the company incurs and total wastage that occurs in the production. It reduces the overall cost of the warehouse storage, as the companies can easily shift from one method of production to another and also it can be seen that when goods arrive as and when they are needed, the need of storage also reduces(Burke Clark, 2016). This is one of the major advantage that the company is having over the traditional method of inventory management. In order to use JIT it is important to have high ordering cost so that there is no disruption in the overall supply chain and the production team gets the product as and when needed. The company must make an accurate assumption on how much product they might need and should place order for the same only, this will reduce unnecessary wastage(Birt, Muthusamy, Bir, 2017). In case there is any disruption in the supply management the overall process of production gets delayed that might cause much loss. In case there is a sudden order of goods which is more then what the company has expected in those cases also high ordering cost will help in ensuring that the company will get the products on time. This will help in reducing unnecessary wastage on part of the company(Chiapello, 2017). In the given case the concept of capital budgeting will be employed to understand whether or not the company is making any profit from the project and in what ways will it be beneficial for the company to accept the project. Six effective steps that will help the company in reaching to a conclusion are- Applying rate of inflation to the present exchange value to know the exchange value for the given currencies after a period of three years. In the given case the annual inflation is given to be 5% in the United States and 4% in Mexico. Since the home company is US company, peso will be converted into US dollars. Calculation of incoming cash flow from the project after three years in terms of U.S dollar. It is said that the company is earning a cash flow of 100,000,000 pesos. In terms of dollar the amount will be calculated after applying the exchange rate that is calculated in the first step. This is what the company will earn in three years in terms of U.S dollar(Given, 2016). Applying the discounted rate of interested to know the present value of the project. The incoming cash flow after three years will be discounted with the rate given to ascertain the present value of the same. All expenditure that the company is doing, will be deducted from the present cash flow to calculate the incremental cash flow of the project. In the given case the cost of the project is given to be $5,500,000. This will be deducted from the net income of the project and on the basis of the same the overall incremental cash flow will be calculated for the given project. Once the incremental cash flow is calculated the company will see whether it is positive or negative. If the incremental cash flow is positive the company will accept the project and if the cash flow is negative, the company will reject the project(Sweeting, 2017). The exchange values plays an important role over here and the inflation rate should also be taken into consideration because the exchange values between two currencies keep changing given the overall rate of inflation. It is thus important that while converting the cash flow in the home currency the company must consider the given inflation rate for their overall analysis(Alexander, 2016). These are the few steps by which the company can calculate the incremental cash flow for the project and can accordingly accept or reject the same. In the last step if the company finds that the net NPV is not positive the company can comprehend making changes to the overall payback period and can also apply other methods of capital budgeting to reach to a proper conclusion(Maynard, 2017). Reference Alexander, F. (2016). 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