Decision Making Tools: Capital Budgeting

This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period, discounted payback period, NPV, IRR, MIRR,

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).

26.8 B. Ex. 26.9 B. Ex. 26.10 Topic Understanding payback period Use of return on investment Comparing NPV and required rate of return Net present value computations Computations for payback period Capital investment challenges Net present value and required rate of return Capital budgeting behaviors Net present value analysis Nonfinancial investment concerns Exercises 26.1 26.2 Topic Accounting terminology Payback period 26.3 26.4 26.5 26.6 26.7 26.8 26.9 26.10 26.11 26.12 Learning Objectives 26-3 26-3 26-3, 26-4 26-3 26-3

In order to correct this absence, the discounting payback period was developed. What discounting payback period does is that it discounts the future cash flow back to its current value in that the investment and the stream of cash flow are in a position to be in comparison with the same time period (Hofstrand, 2013). In order to discount series of cash flow, the discounting rate has to be in use. The discounting rate does represent the cost of capital or the prospective rate of return on other alternative investments (Hofstrand,

Capital budgeting is very important in decision making for the financial manager of any firm. Most new projects take time in developing because of the research analysis required in opening a new addition to the company. The cash flow is a huge factor in making the decision of a project. For instance, capital expenditures require firms to outlay large sums of funds to initialize the project. Second, firms will need to formulate ways of generating and repaying these funds once they are initiate. Third, there must be a good since of timing and critical finance decision to make it all happen.

When making capital budgeting decisions, there are various techniques that can be utilised. Ross et al. (2008) describes that the predominant capital budgeting methods used as being the Net Present value (NPV) method, the Internal Rate of Return (IRR) method, the Payback method, and the Accounting Rate of Return (ARR) method. Conversely, Brealey, Myers and Allen (2011) proposes that the NPV and IRR methods are considered prestige compared to the ARR and the Payback Methods, as they take into account the time value of money. Thus, the following project evaluation will focus on using the NPV and IRR methods.

Christ like life experience during any financial capital planning.  The most important part during the business financial planning is outweighing risk and return on business investments.  Managers should remember to be transparent not hiding any financial exceptions that could alter or change the outcome of the financial statements.  Building a professional group that is consistent year by year requires enforcing professional financing standards by put into effect a detail transparent investment and expenditure planning process. The establishment of clear guidelines of budget and projected benchmarks must be discussed before, during and after budget development.  It is mentioned that capital budgeting “is a systematic method of allocating financial, physical, and human resources to achieve strategic goals. Companies develop budgets in order to monitor progress toward their goals, help control spending, and predict cash flow and profit” (Inc., 2000).  The expertise for a successful final capital budget is a combination of Gods teachings, individual’s expertise and businesses strategic goals.

Investments are necessary for a business to grow. Although, this is true it much more valuable to know about the value and benefit of the investment. Selecting the best investment choice will ensure growth in the future and will generate value. The problem typically arises when trying to utilize capital budgeting skills in determining different tasks with the same risk. There are many ways to determine the correct return gained from investments. The (NPV) Net Present Value has proven to be the best method for organizations to use. NPV gives a direct image of what can be profited or loss when investing. This allows for the best decision to be made when selecting a project.

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

Within this paper, an overview of the general capital budgeting process and how it is implemented within organizations is defined and reported. Key terms related to capital budgeting are also defined. Risk analysis based on the Net Present Value (NPV) is performed on the salvage values before and after sales tax values along with the different sale ranges.

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.

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.

In todays global market place every company or organization is looking for a way to get ahead of its competition. Every owner, CEO, or president is looking for away to keep his or her company or organization on solid financial ground. The one thing that they realize is, in order for a company or organization to stay solvent they will need to find away to stay competitive in this global market place. They have found that this may be done by some type of investment(s), in the form of acquisition, and or merger. In the world of business, capital budgeting is one of the most important steps that a company or organization can take. This process is called Capital budgeting. Capital budgeting is a process that attempts to determine the future. Before any large project begins, the capital budgeting process should be utilized. Without capital budgeting, your company could make a fatal mistake. A company or organization that is looking to invest its resources in a project without knowledge of the risks and returns involved could be seen as being reckless and irresponsible by its owners or shareholders. In the economic business world that we are currently in if a company or organization has no way of gauging the effectiveness of its investment most likely that the business will have little chance of surviving in a highly competitive marketplace (Clayman, Fridson, & Troughton, 2012).

The net present value (NPV) method is used to assess a capital investment project, which evaluates the difference between its cost and the present value of its expected cash flows (Parinno & Kidwell, 2009). The basic concept of NPV serves as a highly recommended capital budgeting technique and is regarded as one of the main functions in corporate finance. Furthermore, NPV is often associated with a capital