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Financial Analysis Of Project

1336 words - 5 pages

MemorandumDate:February 6, 2009To:CEO, Superior Living Inc.CC:CFO, Superior Living Inc.From:XYZSub.:Project EvaluationIntroductionThe Memo is related to the evaluation of the project on the basis of the profitability. The financial pros and cons are included in the analysis, which can occur due to its going public and introducing a new production plant. The company has various options like use of debt source or other source, management's attitude for hurdle rates etc. These issues affect the revenues of the company. A decision for the project is an important task for the company because it includes the long term and significant effects on the company's performance. The IPO of the company will be beneficial to finance the need for the projects. It will also help to increase the image of the company.Pros and Cons of Going PublicThe management is going public to increase its capital at lower cost. It is also known as the public issue. In this method, company offers a fixed number of shares to the public at a stated price. The option of going public is beneficial for the company, but it also has some drawbacks. The following are the merits and demerits that the company faces when it goes public.Advantages of IPO - If the company goes public then following are the advantages for it -•Financial benefits - It is the most important advantage for the company in the form of raising capital. This capital can be used in the various ways like in research and development, capital expenditures or repayment of debt obligation.•Increase in the awareness - The IPO process increases the knowledge about the company. It helps to create the publicity of the company that attracts new potential customers.•Increase in the market share - The increase in the company's awareness also causes an increase in the market share of the company.Disadvantages of IPO - The following are the disadvantages of the IPO in an organization -•Disclosure process - The IPO process requires disclosure for the investors. The public companies are regulated by the Securities Exchange Act, which requires periodic financial reporting that can be a problem for the newly formed public companies.•High cost - The requirement of the act is incredible, that causes an increase in the cost of the company like cost of audit fees, investor relation department etc.•Pressure of the investors - The Company faces the pressure of the investors to earn more profit that causes attention on the short term results instead of long term results (Poser, 2003).Hurdle RateThe hurdle rate can be defined as a rate that is necessary to be obtained by the company to maintain the value of the shareholders and to maintain its market position. The assumption about the internal rate of return (IRR) of the company provides that the management of the company should not pass the project with a hurdle rate of more than 29%. If the management of the company wants to reduce the hurdle rate, then it should...

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