Mini Case Chapter 11 a. What is capital budgeting? Capital budgeting is the decision process that managers use to identify those projects that add value to the firm’s value, and as such it is perhaps the most important task faced by financial managers and their staff. The process of evaluating projects is critical for a firm’s success. Capital budgeting is • Analysis of potential additions to fixed assets • Long term decisions; involving large expenditures • Very important to a firm’s future • Define the firm’s strategic directions b. What is the difference between independent and mutually exclusive projects? An independent project is one in which accepting or rejecting one project …show more content…
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Failure to handle these situations properly can lead to huge product liability suits and even bankruptcy.
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,
Corporate finance is important to all managers because it allows a manager to be able to predict the funds the company will need for their upcoming projects and think about ways to organize and acquire those funds.
There are different types of budgeting that businesses typically use and those include Operating budgets, Capital Budgets and there are many subtypes that exist because a budget can also be created for special events, the recruitment and retention of new staff, and to manage the advertising expenses and return on investments for a business (Demand Media, 1999-2012). According to Demand Media (1999-2012), "An operating budget outlines the total operating expenses and income for the organization, typically for the period of a fiscal year. Capital budgets evaluate the investments and assets of the business, and a cash budget shows the predicted cash flow in and out of the business over a period of time” (para.2 ). According to the Cost-Benefit Analysis (2012), “Capital budgeting has at its core the tool of cost-benefit analysis; it merely extends the basic form into a multi-period analysis, with consideration of the time value of money. In this context, a new product, venture, or investment is evaluated on a start-to-finish basis, with care taken to capture all the impacts on the company, both cost and benefits. When these inputs and outputs are quantified by year, they can then be discounted to present value to determine the net present value of the opportunity at the time of the decision” ("Cost-Benefit Analysis," 2012).
Capital expenditure budget. This budget is needed when an organization needs to invest in major projects and equipments, such as purchases of new products, new information technology systems, in which a management team will conduct a financial evaluation to determine whether the company’s return on investments will be met (Halliman, 2006).
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
Mike Stephan is a first-year staff auditor at Willis and Adams. Mike recently graduated with his undergraduate degree in accounting and was excited about his new job at Willis and Adams. Mike came from a smaller school that typically does not get a lot of attention from campus recruiters. Mike was pleased to get an interview and then an offer from Willis and Adams. From the beginning, Mike was impressed with the firm’s culture and he felt that it would be a great fit for him professionally. Throughout his junior year, he worked hard to reach out to the firm’s recruiters to demonstrate a sincere interest in the firm. In the end, Mike was one of only two students that Willis and Adams hired from his school. Mike believed that his school’s
The capital budgeting process occurs in several stages, but generally includes what? This includes all the steps included in the capital project analysis. It also includes what monies are going to be spent or saved on projects or programs.
Capital Budgeting encourages managers to accurately manage and control their capital expenditure. By providing powerful reporting and analysis, managers can take control of their budgets.
MegaCorp is a large manufacturing firm that operates 5 factories in Dallas, 4 factories in Los Angeles, and 5 factories in Albany, New York. It operates a tightly connected order management system that coordinates orders, raw materials, and inventory across all 14 factories. What type of WAN architecture and WAN service would you recommend? Why?
When compared with the industry, the inventory turnover of S&S Air of 21.43 times is well above the industry upper quartile of 10.89 times. This indicates that S&S Air is much more efficient than the industry average at inventory management.
For your job as the business reporter for a local newspaper, you are asked to put together a series of articles on multinational finance and the international currency markets for your readers. Much recent local press coverage has been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm.
a. Capital budgeting is the process of analyzing projects and determining which ones to accept and include in the capital budget.
Capital budgeting is the planning process used to determine whether the long term investments are worth funding. The most popular methods of capital budgeting are (i) Non-discounted cash flow criteria or (ii) Discounted cash flow methods. Payback period (PB) and Net present value (NPV) are the two methods used which fall into the above mentioned categories
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.