Capital Budget Processes and Techniques

As a financial manager three major decisions are to be made which are investment, financing, and dividend decisions (Pujari, S 2015). When decisions are made in investments financial managers carefully select fixed assets also known as capital budgeting decision or current assets in which funds will be invested by the company (Pujari, S 2015). There are factors that affect the investment and capital budgeting decisions such as cash flow of the project, return on investments, risks involved, and investment criteria. For the cash flow of the project the company invests a huge amount of funds in an investment proposal it is expected to sustain a regular amount of cash flow to meet the daily requirements (Pujari, S 2015).  The amount of cash

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.

This report also contents the analysis of four main different capital budgeting techniques used in the investments for supporting decision making process. Definition, formula of each technique will be given along with the figure of the investments as well as its advantages and disadvantages. The numeric data (initial investment, cash flows…) used for the

The recommendation to acquire Corporate B is due to multiple factors from analyzing the projected income statement and project cash flow statement for the next five years. The first thing reviewed was the revenue generated in comparison to the operating expenses, not including depreciation, before income taxes. Corporation A ranged from 20% to 24% over the five year projection, while Corporation B ranged from 40% to 42% over the same time period. The net income for Corporation A is consistent across the five year project and approximately 56% of revenues, indicating a large portion retained within the organization. Corporation B’s net income is approximately 40% over the same projection. If the only statement analyzed is the income

Firms continually invest funds in assets and these assets produce income and cash flows that the firms can then either reinvest in more assets or pay to its owners. These assets represent the firm's capital. Capital is the firm's total assets and is comprised of all tangible and intangible assets. These assets include physical assets (such as land, buildings, equipment, and machinery), as well as assets that represent property rights (such as accounts receivable, notes, stocks, and bonds). When we refer to capital investment, we are referring to the firm's investment in its assets. The term "capital" also has come to mean the funds used to finance the firm's assets. In this sense, capital consists of notes, bonds, stock,

Capital Budgeting is a planning process that been used to determine whether an organization long term investment like new products, machinery, plants and research are worth to funding of cash through the firm capitalization structure such as debt, equity or retained earnings. Capital budgeting is a process of allocating company or organization resources for major investment, capital or expenditure. The goal of capital budgeting is to ensure that the value of the firm increase to the shareholder.

Companies with limited capital invest in other companies in order to increase their wealth and they use payback period to finance their company. Payback period means the period of time that a project requires to recover the money invested in it. The payback period of a project is expressed in years it is calculated as:

Because the projects are significantly different in size, the coefficient of variation criterion, a measure of relative risk, is more appropriate.

The amount of time is a predetermined amount, and that amount is what is factored in when determining if the investment is a good investment. For example, if a company decides they want to invest in a capital asset that would take less than five years to payback, and after calculating the cash flows and determine it will take only three years to payback or generate enough from the investment, than the investment is a good investment. There is no set rule when determining how much time an investment should have for the payback. That is up to the discretion of the financial managers. One issue with the payback method is that it ignores time value.

Organizations that decide to issue bonds generally have six steps to go through. Let’s discuss them.

As part of the portfolio management system, a selection criterion is used to determine which projects are most in accord with the organizations mission. Selection criteria is usually either financial or non-financial. In the example provided we are considering which project will meet the needs of high annual cash flow for the small startup company. Using the financial criteria for selection we will employ the payback model, which allows for the direct assessment of future cash flows. This model measures the time it will take for the recovery of the project investment (Larson & Gray, 2011). The limitations of this model are the assumed cash flow during only the investment period, the exclusion of profitability, and the effect of the time value of money (Murphy, 2016).

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.

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 explicated 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 that are required to finance those investments (p. 475). Capital budgeting is a central part of the universal practice of accounting as it has an implication on the other

This report describes capital budgeting techniques such as NPV (The NPV of an investment is the difference between its market value and its cost, IRR (The IRR is the discount rate that makes the estimated NPV of an investment equal to zero. PAYBACK (The payback period is the length of time until the sum of an investment’s cash flows equals its cost), discounted payback period (The discounted payback period is the length of time until the sum of an investment’s discounted cash flows equals its cost).

All the various feasibility measures are used to narrow the list of the alternatives. This techniques used in the capital budgeting model that consists of net present value (NPV), internal rate of return (IRR) and payback period.