Statement Analysis Memo, Essay Example

To the CEO of Company D,

Dear Sir,

It is imperative that you understand the aspects of investment from the Bank’s point of view. The bank mainly buys its own currency or that of another nation because of controlling the exchange rate in terms of its supply. By so doing, the Bank is creating a demand for the local currency therefore improving the bargaining power of its own currency against the exchange rate of another nation. In monetary terms, this is referred to as building the central reserves. When the exchange rate stabilizes, the Bank will the release the currency withheld in calculated sequences to maintain the forces of demand and supply of the local currency thus averting marginal fluctuations in the foreign exchange rates.

The Bank began by controlling the interest rates on lending for local banks. This hence allowed banks to borrow freely and easily across with other banks, thus encouraging monetary movement. It also tightened lending conditions for banks and introduced monetary policies that saw tighter restrictions on reporting by banks (Soros, 2008). This was aimed at sealing the leaks that existed between the lending banks and bowing banks. The stability of the financial system in 2007 was mainly achieved by controlling the interbank lending rates. Banks that were in financial impasse were given a longer lending period art a subsidized interest rate, thus allowing them to recover.

According to Giovanni, the European Central Bank, Bank of England, Bank of China, and Federal Reserve put in an equivalent of 77% into the economy in 2008 and 2009 to bolster and stabilize the financial system. This was the percentage of the GDP to the actual debt that was required to revive the financial systems as part of the rescue plan.

Each country came up with sound financial policies that were aimed at controlling the lending rates between its banks as well as encourage economic spending so that the movement of money may be felt again. The main idea was to first of all establish adequate reserves with the central bank that would ensure that the interest rate on local loans is reduced marginally.

The Bank used the interest rate and the exchange rate as the major constraint in order to determine the limits of the monetary injections into the economy. The interest rate reflected the constraint that the economy struggled with towards its road to recovery.

The United States utilized the same criteria since the rising interest rate affected the repayment of loans which then in turn influenced the exchange rate as the Bank exhausted its own reserves.

I agree with the action of the Central Bank since by reducing the interest rate, the Central Bank wanted to encourage movement of funds and interbank borrowing and lending. The basic idea was to encourage the movement of money once again. This would hence spur consumer lending.

1. The depreciation will reduce the amounts used in calculation of N.P.V. hence reducing the N.P.V.

reported

2. Net present value:

This is used to determine the difference between present cash inflow values and present value of cash outflows.

When the NPV is positive, it indicates growth of shareholders investments thus showing a project should be considered or taken up.

In our case, the NPV is positive thus the project should be accepted.

3. Internal rate of return

This is a rate used to equate the present value of cash outflows to the cash inflows of a project.

A project should be undertaken if the IRR is greater than the cost of capital.

In our case the cost of capital is at 12% which is lower than the IRR thus the project should be accepted.

4. The difference between the internal rate of return and the accounting rate of return arises because the accounting rate of return is calculated based on the accounting inflows or profits while the internal rate of return is calculated base on the present value of cash flows.
5. The importance of unadjusted payback period is that it shows the period it takes to recover the initial cash outlay/investment without assuming that the cash flows are generated uniformly.

6.The weighted average  cost of capital when utilizing NPV is of the project can only be accepted if the NPV is greater than W.A.C.C(Weighted average cost of capital) since this shows that the project has resources to which enhance share holders wealth and returns.

7.For a project to be acceptable when weighted average cost of capital has been calculated utilizing IRR, then, the project can only be accepted if the IRR is greater than W.A.C.C(Weighted average cost of capital) since this indicates that the project has resources to increase share holders wealth/investments.

Yours Faithfully,