Read the following passage carefully and answer the given questions.

ABC Manufacturing Ltd., a mid-sized company, is planning to expand its operations by setting up a new production facility. The financial planning team estimates the project cost at $10 million. The company's finance manager must decide how to fund this project and evaluate its profitability.

The finance team forecasts future cash flows, determining that $6 million can be sourced internally through retained earnings. They prepare a financial budget aligning expected inflows and outflows with the company's goals.

The finance manager evaluates options for the remaining $4 million, including issuing equity or taking a bank loan. After analyzing interest rates and dilution of ownership, they decided to issue long-term debt at a 5% interest rate.

A detailed capital budgeting process is conducted. Using Net Present Value (NPV) and Internal Rate of Return (IRR), the project shows an NPV of $2 million and an IRR of 18%, higher than the company's hurdle rate of 12%. The investment is approved.

Post-debt issuance, the company's capital structure becomes 60% equity and 40% debt, maintaining an optimal balance to minimize the cost of capital.

The company plans to allocate funds for raw materials, labor, and inventory to ensure smooth operations. Efficient working capital management will reduce bottlenecks during the initial phases of production.

Why is financial planning crucial for expansion?

It aligns resources with company goals.

The correct answer is Option 1: It aligns resources with company goals.

• In the passage, the finance team prepared a financial budget to align expected inflows and outflows with the company’s objectives.

• This shows that financial planning ensures the right amount of funds are available at the right time and that resources are used efficiently to achieve goals.

• It eliminates costs → Financial planning can reduce waste but cannot eliminate costs.

• It ensures zero debt → Debt is sometimes necessary; in fact, ABC issued long-term debt.

• It guarantees profit maximization → Profits depend on execution and market factors; financial planning only supports the process.