...Risk Management in Capital Budgeting Process Introduction: Capital investment decision, like the capital budgeting process, includes series of analysis and decision making processes that have long term impact on the company. Any investment conducted for future net cash growth by company’s management, regardless of investing in intangible or tangible assets can be described as capital budgeting. Company management has obligations towards company owners to increase company wealth. Risk has been recognized as an important component in the capital budget decision making. The future is uncertain and investments techniques that fail to recognize this fact will almost certainly lead to incorrect conclusions and erroneous recommendations. In today’s uncertain and unpredictable global market, where technical, technological and economic development speed is rapidly increasing, selection of optimal process and selection of optimal project is significantly difficult. In many respects, capital budgeting defines an organization’s leadership. Capital budgeting decisions establish strategic priorities, allocate managers to assemble and communicate information across traditional organizational boundaries, for example, marketing, engineering, production, and accounting. The information is evaluated within a rational cost/benefit decision framework by analyzing cash inflows and outflows over time. In project selection process, corporate manager uses various criteria and methods in selecting...
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...12691/jfe-2-3 Rethinking Multinational Enterprises’ Capital Budgeting in the Globalized New Millennium Fabio Pizzutilo* Department of Business and law studies, University of Bari *Corresponding author: fabio.pizzutilo@uniba.it A strict interpretation of the Ricardian assumptions on international trade leads to a conclusion in favour of the impossibility of a firm investing abroad. Even extending the Ricardian model by including capital among the factors of production, it has to be supposed that, from a purely economic and financial perspective, the choice between directly investing abroad and not doing so is totally indifferent. It is the existence of imperfections in the real and/or financial markets that give rise to the convenience for a firm to exploit its competitive advantages through foreign direct investment (FDI). In a broad sense, a multinational enterprise (MNE) can be intended as a company that holds controlled firms, producing branches, divisions, establishments, subsidiaries, etc., in a foreign country. The reasons that can persuade a firm to become multinational are manifold. First of all, it can be the sole action in order to conduct a specific business. Think about the activity of the extraction of raw materials: it cannot be conducted anywhere other than the mine’s location. Many firms are seeking greater production efficiency, and are thus investing in countries where one or more of the factors of production, capital included, are undervalued given their productivity...
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...This paper will look at the different alternatives that are available to the management of Guillermo's Furniture Store. The paper will include three different alternatives that Guillermo's could use, and what the optimal Weighted Average Cost of Capital (WACC) of each option will be presented along with techniques for reducing risks. There are many forms of capital budgeting models that can be used. Payback made simple, NPV, IRR, and Payback discounted. The payback period: The simple payback period can be defined as “the expected number of years required to recover the original investment.” (Emery 2007) For example, if Guillermo’s invest $300 million in one of its projects, within that particular time period Guillermo should able to receive back the original money invested. For example, Guillermo’s cumulative cash flow is at t = 0 is just the initial cost of -$300,000. In the first year the cumulative cash flow is the previous cumulative of $300, 000 plus the first year for the cash flow of $500: -$300,000 + $42,573=-$257,427. In comparison the cumulative for the second year is the previous cumulative of -$257,427 plus the inflow of cash from the second year of $42,573, resulting in –$214,854. Therefore the calculations of payback occurred during the third year. If the $40,584 of inflows comes in evenly during the third year, then the exact payback period can be found as follows: Applying the same procedure to the other two alternatives (Project High-Tech and Broker) you...
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...FINANCE SUBDOMAIN 319.2 - INFORMATION TECHNOLOGY Competency 319.1.3 Capital Budgeting Analysis - The graduate correctly applies time value of money techniques and techniques that ignore present value for capital investment decisions. Competency 319.2.1 Technology Tools - The graduate uses information technology tools for specified business purposes. Competency 319.2.5 Information Management - The graduate selects appropriate technology applications to manage information and make decisions in given situations. Objectives: 319.1.3-01: Calculate net present value based on a given set of facts. 319.1.3-02: Apply the results of a net present value calculation to a given decision situation. 319.1.3-03: Calculate internal rate of return based on a given set of facts. 319.1.3-04: Apply the results of an internal rate of return calculation to a given decision situation. 319.1.3-05: Calculate the period of time required to recoup the money expended for new equipment in a given situation. 319.1.3-06: Calculate the accounting rate of return based on a given set of facts. 319.1.3-07: Explain the relationship of the accounting rate of return to the internal rate of return for the same capital investment alternative. 319.1.3-08: Calculate net cash flow in a given situation. 319.1.3-09: Explain the impact of depreciation on net cash flow. 319.1.3-10: Explain the role of the weighted average cost of capital in capital budgeting analysis. 319.2.1-04: Produce a computer-based presentation on a business...
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...FIN 403 Week 5 Learning Team Assignment Direct Foreign Investment Decision Proposal Paper To Buy This material Click below link http://www.uoptutors.com/FIN-403/FIN-403-Week-5-Learning-Team-Assignment-Direct-Foreign-Investment-Decision-Proposal-Paper FIN 403 Week 5 Learning Team Assignment Direct Foreign Investment Decision Proposal Paper Prepare a 5,250- to 7,000-word proposal in which you select the optimal financing and investment strategy for your scenario. Include the following information in your proposal: Identify which country you chose and why. Identify foreign exchange rate data. Use foreign exchange and cost of capital data to determine appropriate capital sources. Conduct a sensitivity analysis, based on the following questions: What if funds are blocked? How does this affect the parent organization? What if the subsidiary provided funds? How does the source of capital affect the subsidiary and parent organization? What sources of capital would minimize the cost of capital to the subsidiary? What happens if the country you chose provides incentives to invest? Now that your organization is profitable, the country is taking incentives back. How do you determine the residual value at the end of the project life? How is the value of an organization determined from the following perspectives? Expiration of project life Friendly or unfriendly buyout Economic decision to change locations Nationalization or confiscation of organization Identify available...
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... Guillermo Navallez, the owner of Guillermo’s Furniture store, has been experiencing a slowdown of business, primarily due to the increase in competition. Due to the changes in the operating environment, Guillermo must find an alternative investment opportunity. Regardless of the opportunities available, the value of each is determined by the net present value they offer. This paper, which will include the evaluation of finance concepts from the readings, will identify which alternative is necessary to improve business. It will include an evaluation of possible changes and demonstrate how capital budget analysis can provide the necessary information for the best possible return on investment. However, due to the competition Guillermo is in a situation, which requires an evaluation of processes and find ways to compete. With more competitors in the market, the labor costs have increased but at the same time, the competitors have introduced techniques that lower production costs. These changes have decreased Guillermo's profit margins significantly, but Guillermo can use capital budgeting to increase the profit margins. The geographical location of Guillermo’s provides a large supply of timber; however, this fact alone will not help him compete. Guillermo will need to examine other possible obstacles to success. Such as increased labor cost and maintaining a high quality product. After reviewing the financial data, Guillermo may need to adjust the way the business...
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...Guillermo Furniture Store Analysis FIN571 October 22,2012 Portia Boyd Abstract This paper will define and discuss the different alternatives available to Guillermo Furniture Store. I will include a sensitive analysis; the optimal weighted averages cost of capital, discuss the use of multiple valuation techniques in reducing risks and calculate the net present value of future cash flows for each of the alternatives. Guillermo Navallez was owner of Guillermo Furniture Store located in Sonora Mexico. Guillermo Furniture Store has been manufacturing handcrafted tables and chairs for a number of years. The company was operating at a profit due to inexpensive labor costs and “the area had a good supply of timber” (University of Phoenix, 2012, para. 1) to produce the handcrafted furniture. The company was prospering without any worries. In 1990, the market shifted and Guillermo began facing challenges in the businessdue to two main factors. One was an overseas furniture business moving into the area. This ompeting company uses high tech methods to produce their furniture to “exact specification” (University of Phoenix, 2012 para 2) at reasonable prices. This was unlike Guillermo’s prices which are a little higher due to their handcrafted technique. This meant the new company could produce furniture faster and cheaper than Guillermo’s company The second factor was the awakening of the laid back relaxed atmosphere in the Sonara community. This was due to the result...
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...Qualification structure and syllabus CIMA Chartered Management Accounting Qualification 2010 December 2008 Contents CIMA now designs its qualifications in what we believe to be a unique way. Based on rigorous international primary research with all of our key stakeholders and involving the participation of over 6,000 individuals and organisations – members, students, employers (both existing and potential), CIMA tuition partners, universities and our examiner and marker team – we have designed a professional finance training and development solution that is second to none. I commend this revised CIMA Professional Qualification to you. It will be examined for the first time in 2010, so there is plenty of time to absorb the exciting changes contained in the pages that follow. A qualification focused on the future – fit for purpose, relevant and unique I am honoured to introduce the new 2010 Chartered Management Accounting Qualification to all of our stakeholders. With seismic shifts occurring in the world’s economy, coupled with accelerating concerns about the sustainability of our planet, never before has there been a greater need for organisations to train and develop their people to manage the impact of these changes. With this revised qualification CIMA remains true to its long and proud history of providing finance professionals with a difference – Chartered Management Accountants – who combine management and finance skills in a unique way and who fully understand...
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...Assignment 3 Exercise 6 PAD 505 Capital Budgeting For Professor By Landis Rush May 13, 2012 In the following paper, we are presented with two options in which to make an investment Options A and B. Options A and B is presented with the following chart data: Options A and B have two initial investments and the goal is to determine which investment is the best option. Option A’s initial investment is $2,000,000 and B is $2,500,000 with each having benefits gained throughout ten years. The first step is to determine the payback period for each option. I used the Excel formula to calculate these computations. The payback period is the amount of time for the initial investment to be paid off. For Option A, I took the initial investment minus the benefits until the number 0 is reached or the initial investment is paid off. Following the calculations on the chart it took 5.60 years to pay off the initial investment. I did the same for Option B. For Option B, it took 4.33 years to pay off B’s initial investment. The next step is to calculate the Internal Rate of Return (IRR). The IRR is a rate of return used in capital budgeting to measure and compare the profitability of investments. In Excel is calculated by =IRR ( ) by the sum of initial investment and the benefits obtained. For Option A the IRR is 18.96%, and Option B is 25.53%. The last step is to determine the Net Present worth (NPV) is defined as the difference between the present value of cash inflows and the present value...
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...MPF53 FINANCE “Review the proposed Carbon Pollution Reduction Scheme (CPRS) in Australia and critique its impact on financial management decisions” BY Xiao Nie Yang Song Date: 20th April 2010 Introduction In today’s society, all countries in the world will experience climate change in coming decades because of increasing carbon pollution (climate change 2007). In order to reduce the carbon pollution, ETS and CPRS will be proposed in the world wide and Australia. This essay is to focus on revising the proposed carbon pollution reduction scheme and point out its impact on financial management decision. In the first place, there is a brief summary about the CPRS scheme in detail. In the second place, there is an analysis about major and minor financial management decisions. In the final place, the impacts of CPRS on its financial management decision will be raised. All in all, the conclusion is a summary of the aim of the essay and how to achieve this aim. The CPRS scheme The emissions trading scheme (ETS) in Australia is called Carbon Pollution Reduction Scheme (CPRS). Australia is very vulnerable to the effects of climate change. They recognize that human activity is causing the climate change and also Australia is one of the biggest polluters on a per capita basis. The CPRS will help reduce Australia’s carbon pollution by putting a price on carbon for the first time in Australia’s history. The carbon price means that goods that...
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...Assignment 2: Capital Budgeting Craig Kung Strayer University February 5, 2011 Abstract Bauer Industries wants to investigate the decision to have an additional division added that constructs lightweight trucks. Bauer found that the project would take 10 years to complete. This paper analyzes several scenarios that affect the Net Present Value (NPV) of the Free Cash flow projections from Year 0 to Year 10. The comparison of the various options will aid Bauer Industries in formulating a wise decision. Keywords: investments, capital budget, earnings, forecast, NPV Introduction To invest or not to invest, that is the question. That is the main question that businesses ask when an opportunity to invest in a capital project presents itself. Capital projects are normally long term ventures that require substantial amounts of capital funding. With as much funding and planning necessitated for such extraordinary projects, a very meticulous assessment must be made. So how does a company choose whether or not to invest in a capital project? They use proven analytical methods to evaluate the profitability of the project. Ye Sudong and Robert Tiong (2000), authors of NPV-AT-RISK METHOD IN INFRASTRUCTURE PROJECT INVESTMENT EVALUATION (2000) explain that “the project evaluation methods may systematically be classified into three categories: methods based on return, methods based on risk, and methods based on return and risk” (p. 227). The methods that...
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...Capital Budgeting Paper Team B: Hana Bubshait, Kim Owens, Marla Conner University of Phoenix MBA 592 Professor John Hullar, MPA September 7, 2009 Capital Budgeting Paper The paper discusses how the debt capacity of a governmental entity is determined. The paper after that evaluates the impact of refunding existing debt obligations. The paper after that analyzes the various funding alternatives which can be used to support debt obligations followed by a description of how rating agencies evaluate governmental risks. The conclusion comes in the last section of the paper to summarize the findings of the paper. Determination of Debt Capacity of a Governmental Entity In determining the debt capacity of governmental entity, debt capacity must be identified within an organization. According to Dias, et al. (1995), “project debt capacity is defined as the maximum amount an owning company can borrow in a perfect capital market in order to fund a project” (p. 408, ¶12). In the City of Oasis scenario, the City of Oasis wants to fund the project of building a main bridge over the Tamarra River. The new project will costs $5 million for the new bridge that will be built within 6 months. For the City of Oasis this means that the city needs to create a Capital Projects Fund along with a Debt Service Fund. The City of Oasis also needs to create budgets and issue bonds for public debt...
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...A++PAPER;http://www.homeworkproviders.com/shop/fin-571-week-6/ FIN 571 WEEK 6 Week 6: Managing Financial Growth Resources: Harvard Business Publishing: Working Capital Simulation: Managing Growth Assignment Ch. 1 – 21 of Fundamentals of Corporate Finance WileyPLUS Assignments All additional resources from each week Review the following scenario: Acting as the CEO of a small company, you will apply the principles of capital budgeting to invest in growth and cash flow improvement opportunities in three phases over 10 simulated years. Each opportunity has a unique financial profile and you must analyze the effects on working capital. Examples of opportunities include taking on new customers, capitalizing on supplier discounts, and reducing inventory. You must understand how the income statement, balance sheet, and statement of cash flows are interconnected and be able to analyze forecasted financial information to consider possible effects of each opportunity on the firm’s financial position. The company operates on thin margins with a constrained cash position and limited available credit. You must optimize use of internal and external credit as you balance the desire for growth with the need for maintaining liquidity. Sign-in to the simulation and review each of the following: Welcome Statement How to Play Terminology Primer More Details (this includes information to help you understand how to play the simulation) Write a paper of no...
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...Trucks Case Paper Instructor Richard Hasse March 15, 2015 Outline Summary Mission Objectives Paper Road King Trucks Road King Trucks, Inc has been in business since 1880 and it specializes in transportation. The company was establised by the Smith brothers and it manufactured wagons. With the advance technologies and keeping up with the population they started manufacturing school buses in 1940. The school buses accounted for 50% of it's revenues. Michael Livingston is a newly hired CEO of Road King Trucks, Inc. and he's proposing a new product to the top management, chief design and manufacturing engineers. How much inportantce should be given to the energy cost situation? What are the project's cash flows for the next twenty years? What assumptions did you use? What is the company's cost of capital? What is the appropriate discount factor for you to use in evaluationg the bus project? If you decide to go ahead with the project, which of the two engines should be used in the bus, and why? Evaluate the quality of the project, by using appropriate capital budgeting techniques. Would you recommend that Road King Trucks accpet or reject the project? What are the key factors on which you base your recommendation? Capital is the source of fiancé through which resources are provided. It may be debt financing or equity financing. The cost of debt financing is interest which is the before tax cost of capital, while after tax cost of capital is r (1-t)...
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...PROJECT REPORT ON CAPITAL BUDGETING TOOLS AT CMPDI GUIDED BY: MR. KINTALI NAVEEN SUBMITTED BY: HEEMA KUMARI ROLL NO: CUJ/I/2012/IMBA/11 CENTRAL UNIVERSITY OF JHARKHAND DECLARATION I hereby declare that this project report prepared in lieu of a compulsory paper for the partial fulfillment of Integrated Master in business administration is my original work which I have submitted in Central Mine Planning and Designing Institute to my guide Mr. Kintali Naveen No part of it has been submitted to any other university or organization. All the information and data in my project are authentic to the best of my knowledge and taken from reliable sources. HEEMA KUMARI CERTIFICATE OF COMPLETION This is to certify...
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