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American Grain Corporation

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  1. Exercise "American Grain Company"
    1. Determine the net cash outflow for this project
    2. Determine the net cash flows (years 1 to 7) if the new pellet mills are purchased
    3. Calculate the NPV for the pellet mill project
    4. Calculate the IRR for the pellet mill project
    5. What is the payback for the pellet mill project?
  2. Capital Budgeting
    1. Criteria for Capital Budgeting Decisions
    2. Other rules exist as alternative to the net present value for the capital budgeting
  3. Working Capital Cycle
    1. To manage receivables
    2. To manage Payables
    3. Inventory Management
  4. Working capital ratios
    1. The Stock Turnover ratio
    2. Receivables Ratio
    3. Payables Ratio
    4. Current Ratio
    5. Quick Ratio
    6. Working Capital Ratio

American Grain Corporation: When shareholders are about to invest in project, they need to know what the financial consequences of it are. They need to plan the expenses and the possibilities of return on investment, regarding how long it will take to start earning a profit. To choose the project which corresponds to their expectations, shareholders use a method named "capital budgeting". This method is defined by criteria. These criteria could be very different depending on what the shareholders' expectations are. Do they expect short term return on investment or is their plan focused on a long-term basis? The criteria could thus be diverse and would have to be specifically defined. The capital budgeting method takes into account all the possible expenditures. These include the cash outflow as investments in property, plant, equipment, research and development, and advertising campaigning, which are part of the strategy and help to have future inflow. A number of methods are used in capital budgeting.

[...] Can you remove slow movers from your product range without compromising best sellers? To implement a very efficient inventory management, managers have to review the effectiveness of existing purchasing and inventory systems; know the stock turn for all major items of inventory; apply tight controls to the significant few items and simplify controls for the trivial many; they have to sell off outdated or slow moving merchandise because it gets more difficult to sell the longer the company keeps it; they have to consider having part of the company's products outsourced to another manufacturer rather than make them itself; review the company's security procedures to ensure that no stock is stolen. [...]


[...] Consider charging penalties on overdue accounts. Consider accepting credit /debit cards as a payment option. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old. The longer someone owes a company, the greater chance to never get paid. If the average time of the debtors is getting longer, the company's managers have to wonder the following points: weak credit judgment poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction. [...]


[...] shareholders use a method named ' capital budgeting'. The method is defined by criteria. These criteria could be very different depending on what the shareholders' expectations are. Do they expect short term return on investment or do they focus their plan on a long-term basis? That's why the criteria could be diverse and has to be specifically defined. The capital budgeting method takes into account all the possible expenditures: that means the cash outflows such as investments in property, plants, equipments, research and development, advertising campaign .which are part of the strategy and help to have future inflow. [...]

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