Bill Watts, president of Western Publications, accepts a capital budgeting project proposed by division X. This is the division in which the president spent his first 10 years with the company. On the same day, the president rejects a capital budgeting project proposal from division Y. The manager of division Y is incensed. She believes that the division Y project has an internal rate of return at least 10 percentage points higher than the division X project. She comments, “What is the point of all our detailed DCF analysis? If Watts is panting over a project, he can arrange to have the proponents of that project massage the numbers so that it looks like a winner.” What advice would you give the manager of division Y?

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Asked Dec 22, 2019
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Bill Watts, president of Western Publications, accepts a capital budgeting project proposed by division X. This is the division in which the president spent his first 10 years with the company. On the same day, the president rejects a capital budgeting project proposal from division Y. The manager of division Y is incensed. She believes that the division Y project has an internal rate of return at least 10 percentage points higher than the division X project. She comments, “What is the point of all our detailed DCF analysis? If Watts is panting over a project, he can arrange to have the proponents of that project massage the numbers so that it looks like a winner.” What advice would you give the manager of division Y?

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Capital Budgeting: It refers to the long term investment decisions that has been taken by the top management of a company and that are irreversible in nature. These decisions require investment of large amount of cash of the company.

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Manager of division Y must carefully follow these steps: Potential investment projects are identified in the first stage, it is based on the strategy and need of the organization. After identification of potential projects one must obtain information relevant to the investment decision. Next step is to make predictions about the cash flows and other qualitative factors during the life of the projects. In the forth step, various alternatives are compared in order to make investment decisions.

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