1000+ documents containing “capital budgeting”.

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Capital Budgeting

Over the last several years, different levels of government have been facing a variety of challenges when it comes to budgetary issues. For the city of Ft. Lauderdale, the Department of Public Safety is encompassing 60% of their total expenditures every year. This is because it includes areas such as police and fire / rescue services. At the same time, many of these departments are subdividing into other areas of specialization. To fully understand the way different events have impacted the city requires: examining how debt capacity is determined, studying the effects of refunding / reorganization on existing debt obligations and analyzing alternatives that can be used. Together, these elements will offer specific insights as to as the long-term effects of various activities on the budget and possible tactics for dealing with them. ("Comprehensive Annual Financial eport," 2012)

Discuss how the debt capacity of the governmental entity is determined.

The debt….

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Capital Budgeting and Government egulations Airline Industry

LONG-TEM CAPITAL BUDGETING IN AILINE INDUSTY

Government regulation: Why or why not

Major reasons for government involvement in a market economy

Interests of stockholders and managers: The convergence

Airline: Merger or new capital investment

LONG-TEM CAPITAL BUDGETING IN AILINE INDUSTY

For profit organizations have shareholder's profit maximization as the main aim to pursue. Traditional managerial economics expects that all projects/investments having positive net present value (NPV) shall be initiated by the business managers. However, in real life there are different impediments to carrying out all investments having positive NPV. Main limitations that may restrict future investments arise from government regulations regarding merger and acquisitions (M&A), strategic fit to organization's long-term goals, and risk mitigation measures. In this paper it is analyzed that what are the main limitations that capital investment model faces with respect to government regulations. Although, different financial ratios analysis such as NPV, Internal rate of return (I),….

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Litzenberger and Joy (1975) note that in a decentralized system, quantitative measures are more common for evaluating projects, but they also note that for larger projects there is some degree of centralization. This is the case with Stryker, where the most substantial projects are approved by the Board of Directors.

Ang (1986) notes, however, that there can be agency problems where the interests of the division are misaligned with the interests of the corporation as a whole. A good system for CER, therefore, will incorporate checks into the system, to ensure that projects are aligned. To some extent, alignment at Stryker is generally the responsibility of the Capital Committee. The problem with this system is that the Capital Committee only sees projects that have already been approved by the divisions. This means that there might be some useful projects that are rejected at the division level but that might have….

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Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, I can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest I would probably be considered the best and undertaken first."

The equation to calculating the internal rate of return is a complex one, based primarily on the value of the initial investment:

(Yousaf)

In the case of the first investment project, the equation to calculating the I would be as follows:

130 = 25 / (1 + r) 1 + 35 / (1 + r) 2 + 45 / (1 + r) 3 + 50 / (1 + r) 4 + 55 / (1 + r) 5

For project B, the equation is:

85 = 40 / (1 + r) 1 + 35 / (1 +….

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hen a range of options are presented to management, the capital budgeting process must be used to determine the costs and cash flows associated with each option. However, the capital budgeting process is only as valuable as the inputs and assumptions. If the assumptions are not grounded in reasonable analysis and quality research, the process will not yield a valuable result. If the numbers that are input into the capital budgeting model are dubious, the decision will also be dubious. Sensitivity analysis can help to mitigate some of the risks associated with the assumptions that go into any capital budgeting decision, but even they cannot guard against sloppy work. The capital budgeting process is ultimately one that must be given utmost attention to detail. This is not despite the fact that it is based on predictions of future events but because of that fact. The better the knowledge of….

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"MI: A better measure." Business Horizons. 51(4), 321-329.

Cited in:

http://econpapers.repec.org/article/eeebushor/v_3a51_3ay_3a2008_3ai_3a4_3ap_3a321-329.htm

McClure, B. (n.d.). "Taking Stock of Discounted Cash Flow." Investopedia. Cited in:

http://www.investopedia.com/articles/03/011403.asp?partner=answers

"Modified Internal ate of eturn." (2009). Cited in:

http://www.thinkanddone.com/finance/mirr.html

Parrino, , & D. Kidwell. (2009). Fundamentals of Corporate Finance. (Vol. 1, Ed.).

Wiley Custom Solutions.

Smart, S. And WL. Megginson. (2008). Corporate Finance. Thompson Learning.

Sullivan, A. And S. Sheffrin. (2003). Economics: Principles in Action. Prentice-Hall.

The I is the rate of return that makes the sum of present value of future cash flows and the final market value of a project. The formula may be found at: http://www.visitask.com/internal-rate-of-return.asp. Both NPV and I can also be calculated in Excel, see: http://office.microsoft.com/en-us/excel/HA011136321033.aspx.

The MI formula can be found at: http://www.thinkanddone.com/finance/mirr.html. Additionally, EXCEL has a built-in function to calculate the MI of a series of cash flows, invoked by using =MI. More details may be found at: http://www.techonthenet.com/excel/formulas/mirr.php.

See, for example: http://www.money-zine.com/Investing/Investing/Evaluating-Cash-Flow-esults/; Smart and Megginson, pp. 260-70; McClure, n.d. in:….

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Capital udgeting is a vital part of any business. Investment decisions, which need time to mature, must be based on the returns that they will make. If investment in a project is unprofitable in the long run, it would be unwise to invest in it. However, if the investment will be profitable, it is important to determine this early in the game.

ecause huge sums of money can be lost if an investment or project turns out to be unsuccessful, capital budgeting is an extremely important activity in business. Capital budgeting builds on the concept of the future value of money, which may be spent now. It does this by examining the techniques of net present value, internal rate of return and annuities. The timing of cash flows is important in new investment decisions and the "payback" concept is an important one. (Ross)

When realizing the valuation of corporate securities, the value….

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If the estimates from the investment project are found to be viable, then the development of the capital budget for the particular project commences. The project investment will be included with the master budget of the entity along with the other investments. The process ends on reevaluation. ecause of the long-term nature of capital investment projects, the estimates are coupled with certain risks. In view of this, an approved project must be reviewed periodically to determine if the project meets the original expectation.

During the process, certain analysis and procedures may be conducted for the evaluation. The procedures vary in every firm. Consideration should be made on the particular investment being evaluated. In evaluation of revenue and related cost, a break even analysis may be used. The focal point of this analysis is the computation of the breakeven sales, where the total revenue equals the total costs. There is neither….

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I would suggest therefore that the authors work towards a practical output. Their underlying assumptions about the nature of capital budgeting for research and development projects are strong, but their output is unwieldy. Coming from the perspective of someone who would be engaged in the capital budgeting exercise, I would want to have a model to which I assign my staff and expect a useable result.

Interestingly, the authors appear to concur with my assessment. They offer the caveat that "the model we have presented…will not always be of immediate use for decision support." hich then begs the question of what the point of the exercise was. The issue of capital budgeting for R&D is known, and most certainly the authors are on the right track with regards to dealing with the problem. Capital budgeting for a complex R&D project surely would benefit from having a workable model to account for….

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Capital Budgeting

Sunk costs are costs that have already been incurred. So for example if a company spent money on a marketing assessment for a new product, that would not be included in the decision to bring that product to market because that money was already spent. Sunk costs are not included in a capital budgeting analysis.

Opportunity costs are not included in a capital budgeting analysis. An opportunity cost is something that another opportunity that could have been taken up with that money. Each opportunity should get its own analysis. Consider that there are, if one were to take this idea out to its logical conclusion, nearly endless opportunities. Clearly, the NPV of umpteen opportunities will outweigh the NPV of one, rendering every project a money-loser. The way to compare different options is to give each one its own capital budgeting analysis, and then choose the best one.

Side effects. Side effects….

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Capital budgeting process is the process by which firms analyze possible investments. The process typically involves the gathering of critical information, such as costs and estimates of potential revenue. The method of capital budgeting must also be chosen, and would typically include determining an appropriate discount rate for the company as well. There are a number of different methods that can be used to help make capital budgeting decisions. Payback period is the period in which the initial investment is paid back -- typically the shorter the payback period the better. Other methods include the profitability index, return on book value and the internal rate of return (NetMBA, 2010). The most popular method for making capital budgeting decisions in the net present value (NPV). This method focuses on the time value of money, and uses the principles of discounting future cash flows to analyze the incremental cash flows associated with….

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For company B, the risks associated with cash flows are higher than that for company A, and are in the order of 11%, but nevertheless, the IRR on the cash flows is higher than the minimum required rate of return of 11% making this investment also attractive. As these two projects are mutually exclusive, and considering only IRR investment selection criteria, purchase of company B. with IRR of 14,305% is more profitable investment than purchase of company A with IRR of 13,052%. The IRR method does not consider the size of the initial investment necessary to achieve this rate of return on the cash flows and thus is not a perfect investment decision tool, as typically higher initial investment require much higher minimum rates of return to motivate investor sacrifice this capital and enter into the project.

The payback period reflects the number of years it takes for a specific….

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Any discount rate lower will yield a positive net present value, up to $126,000.

Part II.

For capital budgeting decisions, NPV is a better metric. NPV and IRR are very similar in many respects, and they carry the same reliance on the same underlying assumptions about the underlying cash flows. Additionally, they both relate to the company's cost of capital. IRR is typically used as a go/no-go threshold, whereas NPV measures the raw cash flows.

Ultimately, for most companies they objective is to generate superior returns for their shareholders. What NPV does that IRR does not do is consider the cash return of the project. With limited funds to go around, management will typically need to decided between a variety of different projects. Some will be approved and others will not be approved. In order to meet the needs of the shareholders, management needs to approve the projects that contribute the most….

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Capital Budgeting

If the discount rate is 0%, the project's NPV is $670,000. If the discount rate is 2%, the project's NPV is $614,353.50. If the discount rate is 6%, the project's NPV is $514,815.60. If the discount rate is 11%, the project's NPV is $408,997.50. The project's modified internal rate of return is 39%. The chart will show that the net present value is zero will at 46%, as this is where the NPV intersects the y axis. This implies that when the discount rate is 28%, the project will have a zero NPV. This number should be equal to the internal rate of return, but of course the modified internal rate of return (MIRR) and the internal rate of return (IRR) are different numbers, because of the impacts of compounding.

For the second equation, if the discount rate is 1%, the NPV of the project is $65,358.36. If the discount….

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The problem is that the sheriff was able to nearly or entirely unilaterally make the decisions that were made that led to the problem and that is a unquestionable breakdown in internal controls and city management discipline.

For example, no single payroll/accounting department person (even if it's a controller) should not have total command and control over the creation and disbursement of funds. At least one other person, preferably someone at the same level or above the person that is doing the rest of the work, is double-checking to make sure that no malfeasance is occurring and this includes all recording of transactions as well as money movement in general. Reports should be retained well beyond the statutory minimums and in a secure fashion so that reconciliations can occur at any time. Not keeping meticulous and complete records is foolish on a number of levels and legal compliance is far….

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Economics

Capital Budgeting Over the last several years, different levels of government have been facing a variety of challenges when it comes to budgetary issues. For the city of Ft. Lauderdale,…

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Business

Capital Budgeting and Government egulations Airline Industry LONG-TEM CAPITAL BUDGETING IN AILINE INDUSTY Government regulation: Why or why not Major reasons for government involvement in a market economy Interests of stockholders and managers:…

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Business

Litzenberger and Joy (1975) note that in a decentralized system, quantitative measures are more common for evaluating projects, but they also note that for larger projects there is…

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Economics

Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, I can be used to rank several…

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Economics

hen a range of options are presented to management, the capital budgeting process must be used to determine the costs and cash flows associated with each option. However,…

Read Full Paper ❯4 Pages

Economics

"MI: A better measure." Business Horizons. 51(4), 321-329. Cited in: http://econpapers.repec.org/article/eeebushor/v_3a51_3ay_3a2008_3ai_3a4_3ap_3a321-329.htm McClure, B. (n.d.). "Taking Stock of Discounted Cash Flow." Investopedia. Cited in: http://www.investopedia.com/articles/03/011403.asp?partner=answers "Modified Internal ate of eturn." (2009). Cited in: http://www.thinkanddone.com/finance/mirr.html Parrino, ,…

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Economics

Capital udgeting is a vital part of any business. Investment decisions, which need time to mature, must be based on the returns that they will make. If investment in…

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Economics

If the estimates from the investment project are found to be viable, then the development of the capital budget for the particular project commences. The project investment will…

Read Full Paper ❯3 Pages

Economics

I would suggest therefore that the authors work towards a practical output. Their underlying assumptions about the nature of capital budgeting for research and development projects are strong, but…

Read Full Paper ❯2 Pages

Economics

Capital Budgeting Sunk costs are costs that have already been incurred. So for example if a company spent money on a marketing assessment for a new product, that would not…

Read Full Paper ❯2 Pages

Economics

Capital budgeting process is the process by which firms analyze possible investments. The process typically involves the gathering of critical information, such as costs and estimates of potential revenue.…

Read Full Paper ❯4 Pages

Economics

For company B, the risks associated with cash flows are higher than that for company A, and are in the order of 11%, but nevertheless, the IRR on…

Read Full Paper ❯2 Pages

Economics

Any discount rate lower will yield a positive net present value, up to $126,000. Part II. For capital budgeting decisions, NPV is a better metric. NPV and IRR are very…

Read Full Paper ❯2 Pages

Economics

Capital Budgeting If the discount rate is 0%, the project's NPV is $670,000. If the discount rate is 2%, the project's NPV is $614,353.50. If the discount rate is 6%,…

Read Full Paper ❯2 Pages

Economics

The problem is that the sheriff was able to nearly or entirely unilaterally make the decisions that were made that led to the problem and that is a…

Read Full Paper ❯