...Capital Budgeting Case for week 6 Capital Budgeting Process: Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. In the capital budget case the team analyzed and put a 5 year income statement for corporation A and corporation B. The income statement started with the information provided by the case information for the assignment It is important for business owners to analyze projects and their costs before going through with them. In order to do this they must project the value of the project to see if it is going to bring them the profits they desire. For example, if a business owner is interested in acquiring a new company, he or she must look at different aspects of the company as it is now and project the value over several years to ensure that a profit will be made. In the case presented, two companies are being compared to see which would be the better company to acquire based on income statement and cash flow projections, Net present value (NPV), and Internal rate of return (IRR). This paper will go over the reasoning for the final decision based on the analysis of the projections as well as the importance and differences of NPV and IRR. Net Present Value (NPV) The NPV is the difference of the discounted cash inflows and the discounted cash outflows. The NPV...
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...Capital Budget Recommendation Capital Budget Recommendation Introduction Guillermo faces a big decision ahead. Not wanting to be acquired by a larger competitor or expand his management responsibilities by acquiring another organization, he had decided to move his company from being primarily a manufacturing company to primarily a distributing company. A competitor in Norway needs channels to distribute in North America and using his existing distributor network Guillermo could become a representative for the manufacturer while retaining some of his high end custom work. In addition, Guillermo has a patented process that creates a flame-retardant for his furniture coating but he will need to buy a separate product for a finish coating. Capital Budget Evaluation Techniques Guillermo has many evaluation techniques to choose from to make his capital investment decision. He can also combine more than one technique. The following is a description of the techniques he might use. Finding the Net Present Value (NPV) is one evaluation technique. Net Present Value is a comparison of the present value of the future cash inflows to the cost of projectors by subtracting the cost of the investment from the present value of the future cash inflows (Edmonds, et. al., 2007). “A positive net present value indicates the investment will yield a rate of return higher than 12 percent. A negative net present value means the return is less than 12 percent” (Edmonds, et. al., 2007)...
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...Capital Budget Policy and Process Vernita Davis-Knight Susan Friguglietti Edna Primas Ronald Rehn University of Phoenix-Online February 27, 2008 Capital Budget Policy and Process Capital budgeting is the process by which capital investment decisions are made. Capital can be described as an organization’s operating assets (Diamond, Hanson &, Murphy, 1994). The capital budgeting process includes "planning, setting goals and priorities, arranging financing, and identifying criteria for making long-term investments" (Diamond et al., 1994, p. 463). Previously, capital budgets were known as plant and equipment budgets (Berman, Kukla &, Weeks, 1994). As the previous term implies, most capital expenditures are long-term investments for plant or equipment investments. Most, if not all, organizations have limited financial resources and must decide how to invest the financial resources for the best advantage of the organization. Capital investment decisions have a significant impact on the organization since large amounts of the organization’s resources are at risk for extended periods of time. This makes capital budgeting one of the most important decision making opportunities an organization can undertake (Diamond et al., 1994). There are two basic types of capital budgeting projects, independent projects and mutually exclusive projects. The independent project does not affect the cash flow of other projects. That is, regardless of whether the project is accepted...
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...Learning Team A Capital Budget Recommendation Gerald Shaw, Kenneth Barre, Rosa Daws ACC/543 Linda Miller February 23, 2015 Learning Team Weekly Reflection Week 2 For this week’s assignment Learning Team A will be providing insight on the three capital budgeting techniques in relation to the Guillermo Furniture Scenario. Learning Team A after careful evaluation of the data sheets provided for Guillermo Furniture will identify the best uses for the three techniques and lastly provide a capital budget recommendation that best suites Guillermo Furniture. Three Capital Budget Evaluation Techniques-Gerald For Guillermo Furniture, Learning Team A will advise on three different capital budget techniques available to aid in the decision-making process. Those three methods are NPV (Net Present Value), IRR (Internal Rate of Return), and Payback method. NPV (Net Present Value) NPV or net present value helps an organization figure out whether it’s better to invest in a project based on the net amount of discounted cash flows for the project (Eldenburg, PhD & Wolcott PhD, CPA, CMA, 2011). NPV is best served positive which will indicate that the project will be a benefit by increasing the value of the organization. NPV is calculated through expected cash flows that include an initial investment, incremental operating cash flows, and terminal cash flows (Eldenburg, PhD & Wolcott PhD, CPA, CMA, 2011). That...
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...mately 30 minutes. Type your name in top left corner of both the E xcel and Word document Save the E xcel and Word document on your desktop with the following name: C ase Background It is January 2010 and General Motors is considering the development of the next generation full-size family sedan. ,a Full-size sedans are a mainstay in the American market. According to the US government classification, a fullAdoption of the term necessitated by an increasingly larger variability of car sizes and body styles. Full-size sedan segment size fluctuated significantly over the last 50 years. sales negatively, and so did the introduction of many other family, such as minivans and family SUVs. The last five years have seen a renaissance in the budget-oriented fuel-efficient segment of full-size sedans with all the traditional entrants such as Ford Taurus, Chevrolet , Toyota Avalon, and Nissan Maxima, as well as new players such as Hyundai Azera, all competing for the title of the ultimate large sedan. Other family-friendly car body styles like small and...
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...Peggy Parks was distressed after losing half of her 401k investment and she decided to do something about it. She researched for three years before deciding to make an unconventional purchase of $56,000 for seven alpacas. Peggy’s reasoning, because these alpacas are tangible assets, they are always in her control, unlike her struggling 401k. By the end of the first year, the investment paid off with two new baby alpacas making at least $15,000. Despite the initial success, Peggy is always looking for new ways to enhance her business. This paper will discuss capital improvements that will help her to do just that. Capital improvements are expenses connected with changes to enhance capital assets, extend their productive existence, or add to the worth of these assets. Capital improvements may improve usefulness or productivity or be renovations to the building or other structural improvements (Murray, 2014). Capital improvements can also be written off against income. Pond construction, barns, fences, driveways and parking lots are examples of expenses for breeders. Equipment such as pickups, scales, trailer, and tractors each has a suitable schedule for write-off. We have decided that it would be in Peggy’s best interest to purchase an additional male and female alpaca along with a larger barn for the animals. Alpacas are called "The world's finest livestock investment.” Alpacas also provide of extraordinary profits in the sales of offspring from your herd as well as...
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...The purpose of this paper is to show how our team determined the Net Present Value (NPV), Internal Rate of Return (IRR), our five-year projected income statement and its cash flow of two different investments. This paper will discuss which investment our team chose and will explain our interpretation of the budget. We will discuss our recommendation for which corporation to invest, based on quantitative reasoning. The money used to invest is not our own, therefore, we must chose wisely. Our company has $250,000 to spend on one of the two options given. With the information given, we know the following about each corporation: Corporation A is expected to have revenues of $100,000 in year one, increasing by 10% each year, expenses of $20,000 in year one, increasing by 15% each year, depreciation expense of $5,000 each year, a tax rate of 25%, and a discount rate of 8%. Corporation B is expected to have revenues of $150,000 in year one, increasing by 10% each year, expenses of $60,000 in year one, increasing by 10% each year, depreciation expense of $5,000 each year, a tax rate of 25%, and a discount rate of 11%. When making the decision to invest, it is important to understand the value of the investment. We created a five-year projected income statement. To begin our statement, we had to determine the cash flow for each corporation. According to the text, the net present value of cash flow is described the present value of future cash ( ). To calculate the...
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...Capital Budget Recommendation ACC: 543 April 4, 2011 Fred Johnston Capital Budget Recommendation Capital budgeting techniques are used to determine long term goals, new investment opportunities, and estimating and forecasting future and current cash flows. With any capital budgeting technique measuring risk, uncertainty, and the cost of capital as well as anticipated project performances determines whether to accept the project or reject it. Capital budgeting allows Guillermo Furniture an opportunity to increase their offerings, decrease their cost and possibility find new funding sources to achieve its goals of the company. The payback period is the length of time that is required for Guillermo Furniture to cover the initial investment for the proposed project. The payback period determines how many periods it will take for Guillermo to return the initial investment. In using the payback period when having multiple projects to chose from the one with the shortest payback would be considered a good choice. Calculation of the payback period is summing the project's positive cash flows per period, typically annually, until the sum equals the project's initial investment (www.associatedcontent.com, 2009). The number of time periods passed before inflows are equivalent to original investment price represents the payback period (www.associatedcontent.com, 2009). Net present value method picks up where the payback period lacks because net present value provides a gauge for...
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...Capital budget recommendation ACC543 September 9, 2013 Capital budget recommendation As an industry leader of furniture production in Sonora Mexico, Guillermo Furniture has enjoyed many years of success. This success can be attributed to many factors such as the inexpensive labor found in the region, the ability to price furniture at a premium due to the lack of competition, and the abundant supply of materials found in the area that were needed to produce products. However, new competition as well has a growth in the economy causing increased labor cost has caused the profit margins of Guillermo Furniture to shrink substantially. The need for a new business structure and model has emerged in order for Guillermo Furniture to continue enjoying success and again obtain comfortable profit margins. Capital investment decisions can be critical to the success or failure of a business. Understanding the process of capital budget evaluation techniques is therefore an important step to decision making. Two basic categories of techniques exist, techniques that consider the time value of money and techniques that ignore the time value of money the later producing less accurate results but being easier to understand and compute. The time value of money concept takes into account that the current value of a dollar that is received in the future is less valuable than it is if received today (Edmonds, Olds, McNair, Tsay, Schneider, & Milam, 2007). The two most common time value...
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...Guillermo Case Study: Capital Budget Evaluation Techniques ACC/543 Guillermo Navalles faces many financial challenges in order to succeed in the present business environment. In order to ensure the continued profitability and competitive edge of Guillermo Furniture, he needs to make an investment decision on where to direct capital. He is deliberating between directing capital to purchase advanced equipment, or to adapt a brokerage business model. In order to assess the financial viability of both investment options, he is considering the application of capital budgeting techniques to help him in decision-making. Capital budget evaluation techniques can use data from financial and operating reports to predict potential performance of corporate investment; these entail evaluation using a suitable technique and giving recommendations based on calculations of forecasted future returns of investment. Capital evaluation strategies can be differentiated into techniques considering the time value of money, and techniques ignoring the time value of money. Guillermo will apply both techniques and rely on certain assumptions with their accompanying degree of added risk. The evaluation analysis assumptions are that the investment capital is $5 million with a desired return of 8 percent to cover inflation and decreased sales, as well as a 10-year investment term due to equipment life. The datasheet corrections are as follows: • The brokerage option requires no maintenance...
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...Capital Budget Recommendation Judy Milstead ACC 453/Managerial Accounting & Legal Aspects of Business November 26, 2012 Kyra Squirrel Guillermo Furniture Company is in the furniture business of manufacturing premium quality furniture. The total assets for Guillero Furniture Company from Dec 2010 ($1,350,529) to Dec 2011 ($1,356,411) will help in making the decision in exploring capital budget techniques. Until the 1990’s Guillermo was able stay afloat with just charging a premium rate for his quality furniture until competitors came on the scene. After reviewing his business plan to determine what could be change in the business to be able to compete with his competitors. In making this decision to update his production processes with new equipment or outsourcing the manufacturing to a Norway company or become a broker for this company. To evaluate the options available, many companies utilize various capital budgeting techniques in making the decision before investing in a new project. To base capital projects are evaluated on quantitative as well as qualitative analysis and information. To receive more information, it is best to used more than one technique to applied to a project. In exploring capital budget evaluations techniques to used various intermediate range decisions. In using this techniques will aid in the decision of resulting in the greatest...
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...Capital Budget Recommendation Managerial Accounting and Legal Aspects of Business Introduction As requested by Mr. Guillermo Navallez, owner of the Guillermo Furniture Company, an analysis of existing investment opportunities will be presented through various capital budgeting evaluation techniques. Furthermore, a brief synopsis of how each method assists in determining the investment opportunity with the greatest return will be reviewed. A recommended course of action will be provided coupled with present value calculations to support this proposal. Capital Budget Evaluation Techniques Various analytical methods exist to help business owners make wise capital investment decisions. Because there are many evaluation methods, it makes good business sense to apply the various techniques to the same proposal in order to obtain multiple perspectives (Edmonds, 2007). The Net Present Value (NPV) method which takes the time value of money into consideration, is the capital budget technique which focuses on increasing the value of the business. Using Guillermo’s project data, the marginal cash inflows are defined as the increase in net cash inflows compared to the current situation. Since we know the depreciation formula under the high tech option has a projected useful life of ten years, this is the period used for this analysis. Calculations are as follows: Current Situation High-Tech Option Annual Net Income (Pretax) $46,118 Annual Net Income...
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...Square, The Barn. Given the importance and history of capital budgeting decisions among the CEC (Capital Expenditure Committee), I will give sufficient information to defend the said recommendation. Background: A little over 50 years ago, in 1962, Target first opened its doors branching off from the more upscale Dayton Company. (p.3) It took less than 40 years for this popular concept to morph into SuperTarget stores and Target.com; thus officially giving birth to the Target Corporation. Although direct competitors were difficult to identify in the market, Wal-Mart and Costco emerged as important competitors. (p. 1) While Target’s revenue was very similar to Costco’s at approximately 52 billion (Exhibit 2), its philosophy on customer experience varied greatly. Target appealed to the more affluent shopper with its slogan, “Expect more. Pay less.” Great precision was given to store ambiance giving the customer a well-rounded shopping experience that differed greatly from Wal-Mart and Costco. Target committed large resources (2% of sales compared to Wal-Mart’s allocation of 0.5% of sales) to advertising campaigns. This resulted in the Target Bull’s-eye logo being ranked among the most recognized corporate logos in the country. (p. 4) A notable distinction was Target’s commitment to Market Capitalization. Among its strongest competitors it allocated more resources, in comparison to its own revenue, towards its Capital Budget. This is important for its sales growth in a retail...
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...distinguish among the different capital budget evaluation techniques and explain how these diverse techniques to assist in providing the best recommendation to the company. I also recommend the present value calculations as part of the recommendation that base on a capital budget evaluation technique. Guillermo Furniture Store has located in a very well-known vacation spot in Sonora, Mexico and an excellent supply of timber. It provides Guillermo Navallez the ability to produce a wide variety of tables and chairs. Guillermo Navallez could price the handcrafted products at a slight premium for the quality because labor was relatively inexpensive. During late 1990’s abroad competitor went into the furniture market of Sonora using a high-tech approach that delivered the furniture to exact clients to determine the low prices. Sonora was also home and headquarters to one of the largest retailers in the nation. During the same period the city began to grow and with an increase in population, development expanded, and jobs raised the costs substantially. These events caused Guillermo to watch his profit margins shrink as the cost rose, and the prices fell. Capital budgeting is a process that managers use when they choose among a strategic investment opportunity (Eldenburg & Wolcott, 2011). It is one of the most important financial tools used among organizations across the board, and the intent is to long-term investments decisions. There are capitals budgeting analysis methods to determine...
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...Capital Budgeting Decision AC505 Managerial Accounting I would recommend the acceptance of this proposal of making paint cans for several reasons. First, we look at the payback period. From our analysis, it will take 3.4 years to recover the initial investment. Though Clark Paints has not established a maximum payback period for comparison, an investment has a 3.4 year payback period is considerably a short period of time. It has less uncertainty and is less risky for the company to accept this proposal. Then we look at the annual rate of return, also known as simple rate of return. It calculates the percentage of the annual incremental accounting income of the investment. The simple rate of return of making the paint cans is 13.18% of the investment. Again, this is not a bad investment in terms of the company’s net operating income. Next, net present value is the difference between the cost of the investment and the present value of the cash flow. At a minimum return rate of 12%, the present value of the cash flow is $233,035. Since the cost of the investment is $200,000. We get a positive net present value of $33,035. As a rule of thumb, the positive net present value is a sign of an acceptable proposal. Finally, the internal rate of return also proves that it is better to make the paint cans than to buy from the vendor. The internal rate of return is the discount rate where present value of the future cash inflows equals to the present value of the cash outflow. From the...
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