Capital Budgeting Decision Process

Capital planning and budgeting is a very vital piece in the Public Budgeting System process. It is an essential implement in the financial management practice and is effective in both public and private organizations. It is the method which consists of the determination and the evaluation of the investments and the possible expenses by an organization. As explicate by Lee, Johnson, & Joyce (2008), capital budgets help in determining how much of each form of investment is needed, and it supports an organization in assessing the available revenue which includes loans is required to finance those investments (p. 475). Capital budgeting is a central part of the universal

Annotated Bibliography: The Impact of Healthcare Reform on Capital Budgeting Carolann Stanek University of Mary Annotated Bibliography: The Impact of Healthcare Reform on Capital Budgeting Burt, J.C. & Voss, J.Z. (2012). Capital spending in the current healthcare environment. Health Capital, 5(4).

Virtually all general managers face capital-budgeting decisions in the course of their careers. Among the most common of these is the either/or choice about a capital investment. The following describes some general guidelines to orient the decision-maker in these situations.

Net Present Value (NPV) is the standard method for the financial appraiser of long-term projects. Measuring the excess or shortfalls of cash flows is to measure the difference of the invested and market cost. This method is a good investment, if of course, it brings money to the company, after the discounted rate is calculated. The discounted rate is the project’s Cost of Capital. If the present cash flows and future cash flows are done correctly, this will give the company the New Present Value. Thus, the projects should be accepted only if the plus is on the calculations of Net Present Value NPV > 0 measurements of time, profitability, value to the organization value to the shareholders.

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

There are several traditional methods that can be used in appraising investment decisions. For instance, the net present value method (NPV) which entails estimating the costs and revenues of a project and discounting these figures to get their present values. Projects with the biggest positive net present value are the ones chosen as they represent the best stream of benefits of investing in the project over and above recovering the cost of initiating the projects. The discount rate is another method which is similar to the net present value method but reflects more on the time preference. This approach may focus on the opportunity cost of

Week Four of Strategic Financial Management discusses the chosen provided information for the proposal that concerns building a new factory and includes the incremental cash flows needed for the net present value, (NPV) analysis. The incremental cash flows identifies sales of $3 million a year that equals an increase in gross margin of $150,000 given a 5% gross margin and initial investment of $10 million that includes the cost of building the new factory (Gitman, 2009). The savage value at the end of the project life equals $14 million.

making any necessary adjustments to the budget during the budget period.(BIRT et al. 2014, pp 407)

As is the case with any decision that involves a material investment of capital in a business, the investment must be carefully analyzed to ensure that the benefits to be derived from such an investment exceed the expected expenses in running such an expense. Capital budgeting is the process of analyzing the value that any investment will yield to the company. One of the major reasons why capital budgeting is important is because the investments involve a large cash outlay and once investment has been made the projects may not be brought to a stoop without incurring a loss to the company. In order to arrive at the best decision, all factors should be considered before

Capital budgeting is one of the essentials in marketing decisions for many companies, and it determines whether the invested projects are worth pursuing in the long run or not. Great sums of money can be easily wasted if the investments turn out to be uneconomical and wrong. Therefore; smart investing is very important for the companies that are looking for future growth and success in the both domestic and global marketing. Successful investment projects benefit to the companies by increasing in cash flow and decreasing its risks. North Sea Oil Company is one of the companies that is looking for future increase in cash flow and decreasing its risks by smart investing into two projects. Therefore, this portfolio project will address about the North Sea Oil Company’s proposed capital budgeting projects by using capital budgeting techniques to calculate and evaluate the company’s weighted average cost of capital, payback period, net present value, and internal rate of return from the given case information because calculating the capital structure based on the assumption the projects are implemented will give the investors either positive or negative signals.

Purposely or instinctively, budgeting is one thing we all do each and every day. Most choices a person or perhaps a company tends to make possess monetary undertones, ramifications, as well as results. Profit-oriented companies have to strategize the best way to invest their own restricted sources in a structured manner to increase their own probabilities of making long-lasting durability along with shareholder value (Nagia, 2008).

Capital budgeting is the most important management tool that enables managers of the organization to select the investment option that yields comprehensive cash flows and rate of return. For managers availability of capital whether in form of debt or equity is very limited and thus it become imperative for them to invest their limited and most important resource in perfect option that could prove to beneficial for the organization in the long run (Hickman et al, 2013). However, while using capital budgeting tool managers must understand its quantitative and qualitative considerations that are discussed below.

Capital budgeting decisions are prominent investment decisions made by business owners on how to maximize the financial worth of their company. Each business owner or executive have numerous capital budgeting methods that they employ to provide them with a specific result. Nonetheless, the sole purpose of applying such method is to increase the wealth of their shareholders and company. However, not all capital budget method provide similar results, as we learn that the best method is one that remains consistent, provides continual increase to the firm value, accounts for time value of money, as well as generate cash flow for project capital (Parinno & Kidwell, 2009). The most commonly methods applied by business owners and affiliated with capital budgeting decisions include net present value (NPV), modified internal rate of return (MIRR), probability index (PI), and discounted payback period (DPB). While these methods are different in the role they play, their respective advantages and disadvantages are highlighted as it applies to capital budgeting decisions and methods.

Apart from Net present Value (NPV) there are a couple of more methods for investment appraisal such as internal rate of return (IRR), Payback period (PBP) and Profitability Index (PI).

The internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals.