Week 4 Discussion Question 1b Introduction Capital budgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the firm to recover the outlay of cash and the return the project will generate. Other models just basically employed the concept of the time value of money. We have seen that more current models are attempting to include their analysis factors that …show more content…
Practical problems associated with the Cash Flow estimations Several decision makers have criticized the cash flow estimations as they simply do not agree with the decisions they have arrived at from the use of the models. Since there are uncertainties involved in terms of estimates of cash flows some managers become reluctant to use this method as a part of their decision making process as the calculations are far in the future. Therefore, they will take into consideration the near term cash flows. Other managers may have predetermined notions about which project to adopt and may therefore play with the numbers to achieve a desired result (Brealey, 1984). This can be a problem as the results they receive are not from faulty models but from the manager’s inappropriate inputs into the models. Another area of concern is the selection or choice of discount rate (Cooper et.al, 2001). For example if they use an inappropriately high discount rate then this could yield high hurdle rates or conversely if the rate is too low it yields lower rates. What Cooper recommends is the use of a discount rate that reflects the firms true cost of capital which is sound theory of finance advice. Thus, the best to worst case scenarios should be employed to analyze the best possible decision. When the discounted rate includes
Target Corporation was founded in 1902 as Dayton Dry Goods Company, headquartered in Minnesota. In 1962, the first target store was initiated with the purpose of catering customers with discounted values. In United States and Canada, there are currently 1888 stores, in addition to this, in 2004, all of the subsidiaries were sold by the company following the objective of focusing on select stores of Target Corporation. Currently, it is second largest and renowned discount retailer throughout the world. In contrast to this, the company has been facing fierce and strong competition from market leaders such as Wal-Mart and Costco. There is also a need that the company must adjust its capital budgeting process.
If I was going to prepare a capital expenditure budget request to add a retail pharmacy in the hospital my first choice of two individuals I want on my team is the manager over the hospital current pharmacy. They would have general knowledge based on the hospital patients what illnesses and medicines are common to deal with and give us a valuable perspective on costs, space and displays. In our text (Smith, 2014) " The manager of the hospital pharmacy can control the number of pharmacists and technicians employed relative to patient volume and technicians employed relative to patient volume and the expense for the management of the pharmacy. All of the factors I mentioned is important with establishing a capital expenditure budget. The other
Finance: Evidence from the Field” in the Journal of Financial Economics Vol. 60, 2001, pp. 187-243.
Capital Budgeting (otherwise called venture examination) is the most vital instrument in corporate money to figure out if an organization 's long haul speculations are beneficial or not. It is otherwise called speculation a Working capital are the assets important to bolster the operation of the seemingly perpetual resources. Different cases will be utilized to show Capital Budgeting procedure is the way toward arranging and controlling capital consumption inside a firm. Capital Budgeting is over a period more noteworthy than the period considered under a working spending plan. Capital planning includes the quest for reasonable speculation open doors; illustration, (for example, putting resources into R&D, opening another branch,
All components of the budgeting process hinge on each other and must be carefully coordinated by the district to prevent wasted time and money at the taxpayer’s expense. Capital budgeting is important for developing strategic goals, facilitating communication, and justifying decisions (https://www.schooldude.com/content/capital-budgeting-importance).
The information below objectives is to offer an understanding of different capital budgeting approaches. The development will contain calculations of the NPV along with other capital budgeting approaches for example the regular payback period, discounted payback period, internal rate of return (IRR), profitability index (PI) and modified internal rate of return (MIRR).? It at that time evaluates whether the assignment ought to be accepted or rejected centered on the level for the standards of the different approaches. Furthermore, it presents the motives why the development would be accepted or rejected. The information finishes with a presentation of advantages and disadvantages of each capital budgeting methodology in a table.
1. The treasurer of Amaro Canned Fruits has projected the cash flows of projects A, B and C as follows (measured in e): Year 0 Project A Project B Project C Year 1 70, 000 130, 000 75, 000 Year 2 70, 000 130, 000 60, 000
1) Which of the following statements is false? A) Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project. B) Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis. C) Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation. D) When computing the incremental earnings of an investment decision, we should include all changes between the firm’s earnings with the
The operating cash flows follow: Year 1 Year 2 After-tax savings $28600 $28600 Depreciation tax savings $13918 $18979 Net cash flow $42518 $47579 Year 3 $28,600 $6326 $34926
Wk-4; Q1: A firm uses a single discount rate to compute the NPV of all its potential capital budgeting projects, even though the projects have a wide range of nondiversifiable risk. The firm then undertakes all those projects that appear to have positive NPVs. Briefly explain why such a firm would tend to become riskier over time.
The risk that the company puts itself in within their sector should also give an idea of the capital budget. A higher risk within a specific sector the more that there should be invested. The cause of this was a hurdle rate that was too low. Another point to address is the projects overall contribution to the firms borrowing power. What may occur is the cost of debt ratio to fluctuate with the cost of equity ratio.
Capital budgeting is one of the most important decisions that face a financial manager. There are many techniques that they can use to facilitate the decision of whether a project or investment is worthy of consideration. The four that will be covered within this paper are Payback Rule, Profitability Index, IRR and NPV. Each method has its strength and weaknesses and they will be examined to determine which method is superior to the rest.
This research paper discusses the problems that exist between IRR and MIRR methods and proves that the MIRR is the better method to choose from. The MIRR method is very useful because it can aid an individual when it comes to investing and capital budgeting. One important advantage that the MIRR method has over the IRR method is that it provides a more effective analysis of capital budgeting. The MIRR method is highly recommended for projects in which cash flow is constantly changing or when the project is mutually exclusive. A scenario in which the MIRR method should not be utilized is when one is attempting to make decisions concerning investment over individual projects. Internal Rate of Return IRR is considered to be an important method for capital budgeting proposals. The Internal Rate of Return is the rate, where present value of cash inflows and outflows comes out to be equal or the rate at which NPV from the project comes equal to zero. At this rate, there are no benefits or losses for the Organization. If the Organization earns an IRR on the investment, the NPV will be equal to zero for the investment. It also helps the Management to take a decision regarding investment as to whether they should invest in project or not. A higher IRR makes the project desirable to be undertaken. It provides information about the efficiency of the project because it is based on the assumption that all the cash inflows are invested again in the project at the IRR basis (Brigham &
There can be numerous criteria that determine which capital budgeting project is selected. Some of these factors are the urgent need
The third article “Capital Budgeting Practices: A Survey in the Firms in Cyprus” investigates: 1. the methods used by the Cyprus companies to evaluate investments, and 2. the approach adopted to handle important estimation problems inherent to the use of these methods. It was found that 54.43% of projects evaluation is done by means of a simplified evaluation technique and that 36.71% of the companies use the payback period technique. Among the methods that take into account the time value of money concept, the NPV method is the one most companies prefer, and only 8.86% of them use IRR.