It appears that George is running a profitable business. George is aware you are

Question

It appears that George is running a profitable business. George is aware you are in an MBA Managerial Finance class and comes to you for advice on his working capital practices. More specifically George asks you to do the following: Describe his working capital practices, including his methods of capital budgeting analysis techniques. Analyze the potential pitfalls in his capital budgeting practices that George should be aware of. Develop a simple statement of cash flows for George’s Trains using any information gleaned from the video. What areas of improvement do you recommend?

Explanation / Answer

Worling capital practices includes maintain current ratio of greater than 1.5.

current ratio=current assets/current liabilites

Working capital=current assets-current laibility

This also included optimizing the inventory,account receivable and account payable.

Capital budgeting techniques are internal rate of return,payback period,Net present value method. Each having their advantages and disadvantages.

Internal rate of return(IRR): This methods has more assumptions and if anything went wrong the result will not be accurate and if cash outflow happens at middle of the project then we can have two irr.

Net Present Value(NPV): This is more accurate method but it has too many assumptions.It can not differentate project with low investment value and high returns can have lower NPV but higher IRR value.

Payback: Easy to compute bu it will not consider cash flow happened after payback period.

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