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…… [Read More]
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…… [Read More]
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…… [Read More]
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:
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…… [Read More]
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 present…… [Read More]
"MI: A better measure." Business Horizons. 51(4), 321-329.
McClure, B. (n.d.). "Taking Stock of Discounted Cash Flow." Investopedia. Cited in:
"Modified Internal ate of eturn." (2009). Cited in:
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.…… [Read More]
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,…… [Read More]
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…… [Read More]
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…… [Read More]
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…… [Read More]
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…… [Read More]
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…… [Read More]
Any discount rate lower will yield a positive net present value, up to $126,000.
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…… [Read More]
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…… [Read More]
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…… [Read More]
Some people compare buying a car to renting an apartment: "you pay a monthly fee to use it but don't own it -- and aren't making payments toward ownership. The leased vehicle remains the property of the lessor -- the company that issued the lease" (Peters 2009). However, cars depreciate rather than appreciate in value, unlike real estate. Monthly lease payments are cheaper than payments on a new car, a lease is generally of shorter duration than a car loan. "Another nice thing about car leasing is that you're always driving a new or nearly new vehicle. And of course you don't have to worry about the potentially expensive repair and/or maintenance problems that inevitably crop up as a car ages -- and gets out of warranty" (Peters 2009) the leased car will be under factory warranty for the duration of a standard two-year lease and may even cover routine…… [Read More]
9688%. Therefore the NPV is going to be as follows:
3) to: Management
Re: New Project
The net present value of the project is $6,954.47. Therefore, we should accept the project. The cash flows are discounted by our weighted-average cost of capital. This rate is used as the discount rate because it represents what new money costs JNJ. New capital must come either as debt or as equity. We calculated the cost of equity and the cost of debt. Then, we weighed these figures against our current capital structure in order to determine the weighted average cost of capital. If a project only returned what it costs the company to acquire the capital in the first place, the net present value would be zero. Therefore, if the project has a positive NPV, this means that the project returns to JNJ more than…… [Read More]
How can we know that: (in term of the initial investments and time of cash flow and the relation between them)
Does the decision rule adjust for the time value of money?
Yes, the decision rules do adjust for the time value of money. This can be accomplished in a variety of different methods. For example, if a NPV calculation is used then the initial investment and the future cash flows will be converted into their present values and summed. Using the present value of future streams of incomes is one way of factoring in the time value of money.
Does the decision rule adjust for risk?
Yes, the decision rule also adjusts for perceived risk in an investment analysis. In a NPV calculation, a percentage rate will be determined which represents the risk free rate plus an additional rate that represents the level of risk in an…… [Read More]
Approximately 19% of the short-term liabilities in the form of notes payable and other short-term debt.
The long-term liabilities consist of long-term debt and other miscellaneous liabilities. The debt portion of this represents approximately 39% of the total long-term liabilities. Johnson & Johnson has issued notes onto the market that mature in 2017, comprising the bulk of the long-term debt.
The calculate the market value capital structure of JNJ, we need to find estimates of the market value for their long-term liabilities and their equity. For short-term liabilities, we will assume that because the maturity is under one year, the market value and the book value will be sufficiently similar to one another.
As of market close on Friday August 1, 2008, Johnson & Johnson had 2818.19 million shares outstanding. The price of their stock was $68.61. This gives them a market capitalization for their equity of $191,918.91 million.
The…… [Read More]
The risk of the project is another key consideration. The net present value calculation is based on a set of assumptions about the future cash flows. However, the sensitivity of these cash flows to external or internal events may vary from project to project. Managers and shareholders are often risk averse in nature, therefore the relative risk level of the plant expansion will be taken into consideration prior to project approval. As sensitivity analysis can be used to demonstrate the degree to which certain assumptions are important to the final cash flow projections.
Another potential hurdle to overcome is that of the public image for the project. In this case, there is little potential for public relations disaster, unless the plant expansion will result in environmental catastrophe. However, the company is likely to guard its image carefully so the project will benefit if its proponents spin it as improving the…… [Read More]
25 / $0.03 = 41.66 times
Thus, we have the ability to analyze the differences between the price/earnings ratio under the equity issue scenario and the forward price/earnings ratio under the debt issue scenario. The equity issue scenario will give the company a price/earnings ratio of 48.44 times and the debt issue scenario will give the company a price/earnings ratio of 41.66 times.
The price/earnings ratio under the equity issue scenario is higher because the earnings per share is lower. The earnings have remained unchanged in both scenarios, but the number of outstanding shares has changed between the two scenarios.
Under the equity issue scenario, each share will have a lesser amount of the company's earnings ascribed to it. This is because the firm's capital structure is entirely weighted to equity, with no debt component. The use of debt can help a company's shareholders, because the amount of income for…… [Read More]
Capital Budgeting and Foreign Direct Investment Decision
1. How big is the risk for KFC to enter the African market? What can go wrong?
All business transactions encompass some magnitude of risk. Moreover, when such transactions traverse global borders, they come with extra risks that are more often than not lacking in domestic business transactions. According to Peters (2010), this level of risk is not as extensive and severe as perceived. Africa is the quickest growing expanse in the globe subsequent to the Asian region. However, with the exclusion of interests in mining and petroleum, there is negligible attention paid to the expanse by Western corporations, substantially due to incessant negative perspectives of high political volatility. The mounting interest displayed to Africa as a possibly eye-catching destination for foreign direct investments is fundamentally as a result of the increasing commitment of emerging Asia with nations in the expanse. Western companies…… [Read More]
Capital Budgeting for Guillermo Furniture
Guillermo Navallez, owner of the relatively small yet highly successful furniture manufacturer Guillermo Furniture, is faced with a tough decision. Due to changes in the industry an in his operating atmosphere, Guillermo is unable to continue competitively running his company as he has for the past decades, with a crew of skilled laborers building furniture and with distribution handled essentially by the company itself. He must either automate his manufacturing process with a very high initial cost for equipment but allowing him to continue as a furniture manufacturer, he can shift to distribution for foreign competitors with cheaper products seeking entry into the North American market, or he can begin manufacturing and selling his patented flame retardant instead. Each choice will require an initial outlay of capital and will also have varying returns over the years. Assessing these options from a budgetary standpoint requires the…… [Read More]
D 20 Lev
D 50 Lev
5. The only project that is unacceptable is Project D. At the 50% leverage level. This has a negative NPV. The other projects at each leverage level all have positive net present values. The following graph shows the NPVs for the different projects:
6. My objective in making this decision is to maximize firm value. The projects are mutually exclusive. I would use NPV as the main criteria. This means that Project B. is the most desirable, at the zero leverage level. Project A is the second-most desirable, against at the zero leverage level. Project C. is the third-most desirable. Project D. is the least desirable and at the 50% leverage level is unacceptable. I feel that it is best to use NPV has the criteria…… [Read More]
To solve these emerging needs of the company to satisfy the demand in the market, it is necessary to invest into expanding of the services offered and shifting the existing concept of the club. Firstly, it is necessary to expand the space occupied by renting out additional premises and organizing Spa procedures there. This will require also investment into necessary human resources, such as hiring Spa administrative and consultants specialists offering services for both women and men, and for both facials and body treatment to maximize the services mix. Costs for occupying this space, purchasing necessary equipment and hiring adequate staff so can exceed the current costs by ?450,000, so this is the incremental expense from proceeding with this services expansion programs. Cost to organize the fitness and Spa cafe, which is proposed to call at EnerGi Box, will amount to another ?100,000 annually. The final improvement step is investment…… [Read More]
The aim of hospitals is to measure and improve the quality of health care service for the patients. Patient satisfaction is the foremost concern. However, to run a hospital, there are a lot of other factors are also involved; e.g. managing cost, budgeting, optimizing operations and increase patient satisfaction level. In order to achieve the desired level of performance, the hospital needs to be up-to-date with the latest technology.
In this era of technological advancements, every company has to maintain all their records on computer because it saves time and needs less effort than manual work. Our hospital has digitalized their data but every department has its own data base. In order to optimize the operations, hospital requires having a central data base system.
As Schuhmann (2009) stated in his article that the recent economic crisis has made it difficult for hospitals finance their capital expenditures. The capital…… [Read More]
ith a strong customer and employee basis, the company envisions taking early leadership of the global market. This is also to be based upon management excellence on a local scale. The management team is envisioned to be capable of translating vision into performance on both a local and global scale, while also investing strategically to maximize profitability and performance.
d. In terms of Research and Development, Applied Materials has increased its investments despite economic downturns. The purpose of this was to increase its potential future profitability by providing advanced manufacturing systems for its customers worldwide. This proved to be a good strategy, as the company had build a broad product line that catered for nearly every chip manufacturing stage. In order to reach the next step; integrating systems to perform a specific process sequence, a new facility was needed, and 1997 saw the beginning of construction on the Equipment and…… [Read More]
But even with no cost savings whatsoever, this project has a positive NPV.
e can see, therefore, that the greatest area of sensitivity is with the terminal value. The terminal value at present is worth $143 million of the NPV. If we break down the variables that go into the terminal value, however, we notice that the cost savings are critical. If SGA expense is not reduced, then the terminal value is reduced to $67 million and the total NPV for the entire project ends up being $98 million. This figure is less sensitive to the change in cost of goods sold.
e should also consider testing combined sensitivity of our shakiest projections. Sales may not live up to expectations and cost savings might not occur. If we assume no net income and no additional cost savings, the project will have an NPV. If we assume that our expectations for…… [Read More]
The NPV method is when the company will discount all possible income received from an investment, to where it is in line with their projected minimum rate of return (hurdle rate). At which point, managers will be able to see if the present value will have a positive or negative return for the organization in the future. Those projects that can provide positive present values will more than likely accepted, because they are providing a return that is in line with the company's minimum expectations. As a result, managers can use this method as another way of determining, if a project can meet their minimum objectives. When evaluating different projects, this provides an effective way of comparing the investment with the minimum returns. At which point, managers can see which project would provide the greatest economic benefit to an organization. ("Techniques of Capital udgeting," 2009)
The MIRR is when the…… [Read More]
It would be difficult for the company to satisfy its shareholders with differing interests, but there is a solution-Net Present Value.
Using Net Present Value (NPV) as criteria to select projects assumes proficient capital markets. In other words, in order to work the company has to have access to whatever budget is needed to continue the positive Net Present Value projects. Sometimes there may also be capital ration and the concept of capital budgeting process becomes more and more complex.
Alternative Rules for Capital Budgeting
While NPV is the rule which maximizes value of shareholders, some companies use other strategies for their capital budgeting decisions. Common alternative strategies include:
Internal Rate of Return (IPR)
Return on Book Value
Investment decisions made from the Profitability index and Internal Rate of Return methods agree with those of Net Present Value. Decisions made using the return on book value…… [Read More]
There are five strategic projects that are available for Superior Health System. The system lost money last year, but it does have a contingency fund. Whether it is worth dipping into that fund, or other avenues of financing, depends on the strength of these projects. So it is important to analyze the projects.
Partner with a major supplier who will guarantee price, delivery, and product quality
Expand the ENT, Plastic, Gynecology, and Orthopedics surgical programs
Develop a cost-reduction program.
Spend $3,000,000 to expand primary care physician membership in Corinth Health Systems, SHS's PHO
The rational for this order is as follows. Financially, the first two options are positive. Partnering with a major supplier, if it costs nothing up front and delivers that sort of value, should have been done yesterday. Expanding the ENT, gynecology and orthopedics departments has the highest up front cost, and while that might be…… [Read More]
Capital Budget Processes and Techniques
People often ask what happens when there is a surplus of imports brought into the U.S. Many think that we just have more of what we brought in to be able to hang on to and sell at a later date but that is not the case. When there is a surplus of the products that have been brought in then the price of what the surplus is will drop. Unlike when there just isn't enough for the demand for the product then the price will raise. The reason that the price will drop is due to the products already have been paid for and now they are storing the products which cost money.
When the price is dropped then this allows for the product to be moved quickly and make room for more product and different kind of product. By doing this the price…… [Read More]
Centralized application and client management allows efficient solution of application management, access, performance, and security. Below is figure one taken directly from Citix Systems (Server-Based Computing, 1999).
The new architecture will have various types of technology implemented throughout the system. The main component will be the internet which provides the foundation for the architecture. Other web related technologies such as HTML, and communications protocols are also used. The architecture first begins at the presentation level. In regards to payroll this would consist on online paycheck review, or benefits review. At the presentation level, there is the client system, which is used to view Web page information. The client contains both presentation and application logic components. At the content level, there is a Web server that provides interactive view of information from a relational database. Finally, at the data and service level, there is a relational database system, which provides data…… [Read More]
Caterpillar Capital Budgeting
There are a number of qualitative factor that go into a capital budgeting decision. The first is that the company needs to think about how the purchase fits with its overall strategy. Caterpillar has an overall strategy, and its resources should be directed towards that. It has to think if a new computer network system -- which will have more costs than just 10% of last year's profits because there is a learning curve with new computer systems -- is going to be a good use of resources. Opportunity costs are a major issue in capital budgeting decisions because that money could be deployed elsewhere (CFA Institute, 2014).
There are other qualitative factors as well. For example, activities must be within the ethical framework of the company. They must also have a positive effect on some element of the company's objectives, like customer service. Ideally,…… [Read More]
River County's Capital Budget
River County Capital Budget
Here at River County we have put together a capital budget because we are planning to make several principal achievements for the next year of business in 2012 because we believe that after further evaluation of the investments we have made in 2010 has helped us determine which items are beneficial to the company and the consumer. What we must ask ourselves at River County is "If we continue to purchase these types of items in the future, will the profit to our corporation be larger that the expenditure of the asset?" We realize that these items do vary; however, we are able to see the positives and negatives of these smaller and larger units by not only calculating the different costs and expected years of the product or asset, but to look at the company's averages, as well.
In reference to…… [Read More]
The correct net cash flow for the second year is $455,000
The impact of depreciation -- in all years -- is that it lowers the taxes payable. Depreciation is a non-cash expense, and therefore it lowers the taxable income of the organization. When the taxable income is lowered, the overall taxes are also lower. The depreciation does not count in the net cash flow, and therefore the net cash flow is going to be higher than the net income in any year where there is a depreciation charge.
It should be noted that you must use depreciation for this question. As per GAAP, you have to use depreciation on capital assets. This will create a tax benefit. The tax benefit is an incremental cash flow, and all incremental cash flows are to be included in a net present value calculation. Thus, to exclude the effect of depreciation would…… [Read More]
South Coast Railway is evaluating a proposal for a five-year franchise from the UK government. This proposal would be to operate a high speed commuter rail service from 2018 to 2022. The following report will examine the financials relating to this decision, and the decision-making heuristic.
The decision at hand is essentially a capital budgeting decision. There are a few different ways to evaluate a capital budgeting decision. The most common is the net present value (NPV) technique. This relies on discounted future cash flows to make the decision. The principle behind the use of discounted cash flows is that money earned today can be reinvested, and because of that, a pound earned in the future is inherently worth less than a pound earned today. The value of future money decreases over time. The NPV method discounts those future cash flows back to present value, and compares then…… [Read More]
Hay Taxi should replace the new vehicles after five years. This decision comes about after a capital budgeting analysis that illustrates the different possible scenarios for replacing the vehicles. A net present value calculation was done for each scenario to determine which scenario delivered the highest total net present value over the next six years for the Hay Taxi company. There is little difference between replacing the vehicles after year six, but year five yields a slightly better net present value. It is not recommended that the vehicles are replaced any earlier than this.
The heart of the methodology is the net present value analysis. The net present value calculation takes into account all of the incremental cash flows to this decision. The cash flows in question are the cost of the vehicles, their salvage value, the cost of replacing the batteries should the cars be kept long enough to…… [Read More]
Capital Budget for iver County
In the current dynamic business environment, finance managers are continually faced with decisions on the best type on assets to invest in. County governments, for instance, have to analyze various investment decisions on behalf of the residents, and to estimate costs and benefits that are related to these decisions. According to Peterson and Fabozzi (2002), firms, as well as counties, should continually invest funds in assets in order to produce incomes and cash flows that will promote growth. In particular, capital assets like equipment, machinery and vehicles, which have a long estimated life, require thorough planning to ensure they give good returns on investment. Baker and English (2011) also state that it is imperative for finance managers to project the cost of capital expenditures to establish whether there is enough cash for asset acquisition and if not, consider alternative methods, such as leasing or renting.…… [Read More]
Guillermo Capital Budgeting
Guillermo is faced with a difficult operating environment. Competition has intensified, and this is driving down his margins. At the same time, labor costs are rising. This is putting a squeeze on Guillermo. At present, it does not look like he can compete head to head against his new rival, as that rival is using a technological competitive advantage to outcompete Guillermo. As a result, Guillermo is now faced with three different options for revitalizing his business. The first is to become a broker for a high-tech competitor based in Norway, a move that would take him out of the manufacturing business. The second is that he could add value to his existing product perhaps allowing him to improve his margins. Guillermo's third option is to adopt the Norwegian company's technology, as this would lower his cost of production significantly, restoring some of his net margin.
In…… [Read More]
The IRR too does not distinguish between the positive investing o negative boowing+ investing situation, whilst the NPV makes a clea distinction.
NPV is supeio to IRR fo mutually exclusive investments. Finally, NPV and IRR make diffeent assumptions when it comes to einvestment assumptions. This can esult in conflicts and cossove in anking of mutually exclusive pojects.
Pofitability Index (PI)
The PI calculates the pesent value of a poject compaed to its cost. It is the sum of the pesent values of the poject divided by the initial cost of the investment.
(Algoithm: PI = NPV / Investment)
Pofitability Index Decision Rule
When faced with mutually exclusive investments with capital ationing (i.e. A limit on the amount of funds available fo investment), choose the poject with the highest PI. (FIN 301)
PI is only used in connection with capital ationing.
This is the numbe of yeas that it…… [Read More]
Value and Capital Budget
The reference company in this case is Starbucks. The company is currently trading at $53.55 (Yahoo! Finance, 2012). The five-year chart for Starbucks is as follows:
Yahoo! Finance (2012)
The company's current upward trajectory basically began when it rehired former CEO Howard Schultz to run the company again. Since that point in time, Starbucks have seen its former success rate be restored and the share price has been rising steadily (Kaplan, 2011). The improvement in the stock price has been about $10 per year and there is no reason to think that, with a strong economy this year, Starbucks will not continue to see this rate of growth. The futures price for 100 shares of Starbucks one year into the future will be around $65 * 100 = $6,500.
The stock price has been steadily improving. Although Starbucks does have higher than average volatility (beta 1.28),…… [Read More]
Mckenzie Corporation's Capital Budgeting
Given value of Mckenzie in different scenarios,
Expected value of the company within one year with Expansion is as follows: =
Formula of E (value of company)
= "P (Low)*V (Low) + P (Normal)*V (Normal) + P (High)*V (High)"
=0.3*22,000,000 +0.5*32,000,000 +0.2*52,000,000
= 6,600,000 + 16,000,000 + 10,400,000
= $33 Million.
Expected value of the company within one year without Expansion is as follows:
= P (Low)*V (Low) + P (Normal)*V (Normal) + P (High)*V (High)
= .30*20,000,000 + .50*25,000,000 + .20*43,000,000
=6,000,000 + 12,500,000 + 8,600,000
= $27.1 Million.
Company's debt is $25 million.
Thus, the expected value of the company debt without expansion
= .30*25,000,000 + .50*25,000,000 + .20*25,000,000
= $7,500,000 + $12,500,000 + $5,000,000
= $25 million
Thus, the expected value of…… [Read More]
Capital Budgeting for Guillermo Furniture
Guillermo Furniture has an uncertain road ahead, with several options that its owner can select from in an attempt to bring his company into the twenty-first century as a profitable and productive entity. Industry changes and changes in the regional economy have made it impossible for Guillermo to continue running his high-end hand-made furniture with the same laborious and highly skilled process while remaining competitive with more automated companies and those with wider and more efficient distribution networks. The options facing Guillermo and Guillermo Furniture are not ideal from the owner's perspective, but considering them in an objective light should allow him to select the best alternative for his company in the changing economic environment. The first alternative is that he could automate the manufacturing process, which would come at the cost of substantial capital but would allow him to remain in his…… [Read More]
Private-label securitization has basically ended, and Fannie and Freddie were positioned into conservatorship by their controller subsequent to working in a dangerous and unsteady way. The job currently is to figure out how best to restore a connection between homebuyers and capital markets in a manner that deals with the problems of the old arrangement (Bernanke, 2008).
One alternative that has been talked about is that of privatizing the GSE's and letting them contend in the marketplace as private mortgage insurers and securitizers. In order to get rid of the assumption of government backing and to arouse competition, some suggestions supporting privatization call for collapsing the corporation into less significant components prior to privatizing them. Privatization would resolve a number of troubles connected with the present GSE model. It would get rid of the disagreement amid private shareholders and public policy and probably reduce the total dangers as well (Bernanke,…… [Read More]
One of the biggest differences between new capital projects and renewal/replacement projects is that the variables are less known. The cash flow for the next few years is subject to a higher degree of uncertainty, but so too is the risk profile for the project. The latter is especially important when the project is in an entirely new business, and the firm has very little concrete information to go on. The reality is that for renewal projects, there is a lot more certainty about everything, and that makes a difference in the capital budgeting process because the numbers are more reliable and the company knows that the discount rate appropriately reflects the risk associated with that project. It must be cautioned, however, to remember that incremental cash flows only should be incorporated into the calculation for renewal projects, not money that has already been committed to the project (Investopedia,…… [Read More]
Santos Capital Budgeting and Financial Analysis
2a) Company Perspective
Working capital measures a company short-term financial health as well as a company's efficiency. To calculate a working capital ratio, the paper uses the following formula:
"Working Capital atio= Current Assets / Current Liabilities"
In other words, the working capital ratio measures a liquidity capability of a company that measures whether a company has enough working capital to settle its short-term liability. A working capital below one indicates a negative working capital revealing that a company will face challenges in settling its short-term liability. On the other a working capital of 1.2 and 2.0 reveals that a company has enough liquidity to settle its short liability. However, working capital above 2 shows that a company is not embarking on an investing policy.
The paper uses the following financial tools to measure the working capital efficiency of Santos Company:
Working Capital atio…… [Read More]
According to the AMA, capital budgeting is "the decision-making process used by companies to evaluate long-term investments in large capital assets" (Hampton, 2011). Zeit (2013) makes the point that construction projects are included in the category of capital investment decisions, and that designers and architects are often involved. eiter et al. (2000) argue that because of their size and critical strategic nature, "capital investment decisions are among the most important decisions made by firms."
What this means is that capital projects tend to be large-scale projects that have several key characteristics. They require a lot of money, to the point where that money may need to be acquired through financing. So construction projects in particular like new buildings or new wings would qualify. There is some ambiguity in the research if a takeover or merger would qualify as a capital project when financed with cash, but a small-scale…… [Read More]
Due to Ford's international presence, this database needed to be accessible remotely, and so the database was created to have remote access from any browser in Ford's locations in 120 countries. Utilizing this technology is a fundamental piece of Ford's mission, therefore it was important to make sure that technology used would be accessible and easily manageable by its employees. Since the technology used is simple enough to be used on a regular browser, there is little in depth technology training needed by the majority of employees who would be using and accessing the system. This helps reduce training costs as well as ensures practical usage within the company. Since Ford's financial position has taken a tumble from its successful days of the past, this technology proves essential in reducing unnecessary costs and helps keep the company running as smoothly as possible without reckless spending. Eliminating unnecessary high maintenance costs…… [Read More]
Capital Asset Pricing Model and Arbitrage Pricing Theory:
Capital Asset Pricing Model (CAPM) is an arithmetical theory that describes the relationship between risk and return in a balanced market. The Capital Assets Pricing Model was autonomously and simultaneously developed by William Sharpe, Jan Mossin, and John Litner. The researches of these founders were published in three different and highly respected journal articles between 1964 and 1966. Since its inception, the model has been used in various applications that range from public utility rates to corporate capital budgeting. However, the initial introduction of the model was characterized by suspicious view from the investment community. This was largely because CAPM apparently indicated that professional investment management was hugely a waste of time. Due to its implementation problems and shortcomings associated with its relation to Arbitrage Pricing Theory, Capital Asset Pricing Model has continued to face constant academic attacks.
Overview of Capital Asset…… [Read More]
Operating expenses include selling and administrative expense. Ordinarily, a forecast or budget for selling expenses is prepared together with the sales budget or profit target because selling efforts such as promotions, commissions and salaries of the sales staff are directly related to sales. Selling expenses may either be variable or fixed. Administrative expenses include projected administrative costs for other than production or selling activities. These expenses are mostly composed of fixed costs such as research and development, insurance payments and government taxes.
3. Calculate expected profits
Profit is the excess of revenue over total costs and expenses incurred in generating such revenue during the period of operation. Profit can be expressed in the mathematical equation:
Profit = Sales - Total Costs and Expenses]
Costs having been considered, the budgeted profit plan may now be established. Injecting the concept of 'revenue less expenses equals profit,' the profit may be calculated as…… [Read More]
Looking over a spreadsheet can clarify when to make larger purchases, such as waiting until the start of a new billing cycle, or negotiating better payment terms offered by suppliers and any creditors, especially when interest rates are volatile.
Once the need for a budget is established then the organization can consider what type of budget it desires. For example, with zero-based budgeting, "all expenses must be justified for each new period. Every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one" (Zero-based budgeting, 2009, Investopedia). hile it is true that zero-based budgeting is more costly than traditional cost-based budgeting, it also favors enterprises specializing in areas "that achieve direct revenues or production" in the enterprise (Zero-based budgeting, 2009, Investopedia). For larger organizations,…… [Read More]
This information will affect the opportunity cost of the decision, because the company will not have any access to the Chilean market. Well, more likely it will need to sue via the WTO over the policy, so it would eventually gain access to the Chilean market, but until that happens would be shut out. However, there are always opportunity costs associated with any decision. The decision as to whether or not the company should set up in Chile has to be made based on the merits of that decision alone. Making decisions based on speculation and worst-case hypotheticals, in particular when those are opportunity costs, is poor decision-making practice. Thus, this rumor about Matsubara should not have any influence on the decision with respect to setting up in Chile. The decision is still that setting up in Chile is expected to have a positive NPV, and should be undertaken.…… [Read More]
[calculations available in full version]
The calculations were done in Excel, except the payback period. This was done starting at -850 and then adding back each year's cash flow. Year 5 started with a deficit of 20, which amounts to 31 days worth of payback, in other words the payback will be complete by the end of January in Year 5.
2. Based on this analysis, the company should open the mine. There are several reasons why. First, there is no rule of thumb for Bullock with respect to payback period – and once the project has started it will be finished, so that is not really a great way to analyze the problem.
Second, IRR and MIRR are both above the cost of capital, which is assumed to be the company's hurdle rate of 12%. A project that returns above the cost of capital is normally a viable one.…… [Read More]
The cost of debt is 13%. The cost of common stock, using CAPM, is as follows:
The cost of preferred stock is (10/90)(1-(2/90) = (.11111) / (.9778) = 11.3%
The company's WACC is (.3)(13)+(.16)(11.3)+(.54)(14.15) = 13.349%
The expected cash flow from the investments is the weighted average:
The standard deviation for the smelting is 2133, while the standard deviation of paving is 10,234.
The coefficient of variation for the smelting is 0.1315 for the smelting and .6478 for the paving.
The paving option has the higher risk. The standard deviation is a good measure of risk and the paving option has a much higher standard deviation. Further, it has a higher coefficient of variation as well. On both measures, the paving option has the higher risk.
7/8. The net present values and IRRs for these two are as follows. First, the smelting:
Flow…… [Read More]
Capital budgeting is an important process for all organizations because it gives them the means to compare different investments. For example, a manager can use capital budgeting to evaluate different proposed projects in the organization to attempt to estimate which one's will return the most value to the organization and its investors.
"When a company is looking at, for example, acquisitions of other companies, development of new lines of business or major purchases of plants or equipment, capital budgeting is the method used to determine whether one option is better than another. There are several capital budgeting methods, each with its pros and cons (Financial Web, N.d.).
There are several methods of using a capital budgeting process and each method can be more appropriate in certain situations over the others.
The misuse of capital budgeting can be extremely costly to organizations because they might devote large capital allocations to projects…… [Read More]
einvestment rates are an embodied assumption in the NPV, I and MI methods because in each of those methods, the cost of capital for the company is typically used as the discount rate. The cost of capital for the company is going to be comprised of the different elements of the capital structure, but in each of those the reinvestment rate is a key factor. It is assumed that the cost of capital is the reinvestment rate under each of these methods, and this assumption introduces the potential for error.
The assumed reinvestment rate of MI is the cost of capital, but this is problematic for a couple of reasons. The first is that this does not take into account project-specific risk (Damodar, n.d.). Each project has its own risk. Thus, the reinvestment rate should not necessarily be the same rate that is used in an NPV, I…… [Read More]
There are only a couple of key assumptions used in the creation of the NPV data. First, with respect to fixed costs, the wording "will increase by 3.8% over the life of the project" is ambiguous. We need an actual figure for each year. It is assumed therefore, in the interests of being conservative, that the word "annually" was accidentally omitted and fixed costs will increase 3.8% each year over the life of the project.
The sunk costs, it must be stated, were omitted from this calculation as they are not an incremental cash flow (Investopedia, 2015).
There is nothing stated about the return of working capital at the end of the project, so it is assumed that this money vanishes into the ether at the end of the project, because returning it would substantially increase the value of the project. Whether the working capital is returned at…… [Read More]
esults and acceptability of the item for key stakeholders
Da Vinci is a lucrative product that has immense contributions to the delivery of health services in many health centres globally. The effectiveness of the product lies on its new entry into the modern market. Da Vinci production and use have enlightened the public and hospital fraternities on new approaches of managing surgery operations. The resultant effects that are going to be felt after using the product are more increasing and beneficial than using the old mechanisms. The innate objective of the tool will improve on delivery of surgery services in ways that are more safe, effective, and affordable to the public. Da Vinci was first introduced as a safe way of improving surgery operations in the hospitals. Moreover, the use of the product had not been made public. Now that the machine will be available in many health…… [Read More]
This budget is a static budget. The variable components are based on the number of students, and in this budget the amount of students is assumed to be fixed throughout the year. The budget does include three different student levels, but this reflects sensitivity analysis, not a flexible budget that changes over the course of the year. To make the budget flexible, the school would need to make changes to the different elements of the budget as the school year progresses. That is entirely possible the way this budget is structured, but the possibility of converting it to a flexible budget does not make it a flexible budget.
The total revenue per student excluding grants is taken by adding up the non-grant revenues per student: $6,063.06
The total expenses per student depends on how many students. At the 120 student assumption, total expense per student are $4,518; at the…… [Read More]