...I. Economic Benefits Leasing The first and most obvious benefit of leasing the space is the significantly lower capital expenditure at period zero. The capital expenditure for the leasing project is more than half of that of the building a business project. This means that there are less upfront payments as well as less potential debt. Additionally, the guaranteed lease payments indicate a consistent cash flow for the hotel regardless of the success of the pub venture. In comparison, depreciation is also lower from a leasing standpoint due to the lower initial capital expenditure. As the main responsibility of running the business is outsourced to the leasing company, this initiative also incurs less annual costs in terms of raw materials needed to run the business in addition to less operating expenses for the hotel. This situation proves to be a very safe investment for the hotel, as they are taking on minimal costs and have a guaranteed income of capital through the lease payments. Building This initiative proves to be more risky than leasing; nonetheless offers a higher return. The initial capital expenditure is double that of leasing the space, however it does give the hotel full earnings of all future revenue. While incurring additional raw material and operating costs throughout the year, this initiative does prove to be more expensive with a higher degree of labor required. That being said, if run properly the venture is projected to turn a much higher profit...
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...Comparing Net Present Value and Internal Rate of Return by Harold Bierman, Jr Executive Summary • • • Net present value (NPV) and internal rate of return (IRR) are two very practical discounted cash flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments, the NPV method is easier to use and more reliable. Introduction To this point neither of the two discounted cash flow procedures for evaluating an investment is obviously incorrect. In many situations, the internal rate of return (IRR) procedure will lead to the same decision as the net present value (NPV) procedure, but there are also times when the IRR may lead to different decisions from those obtained by using the net present value procedure. When the two methods lead to different decisions, the net present value method tends to give better decisions. It is sometimes possible to use the IRR method in such a way that it gives the same results as the NPV method. For this to occur, it is necessary that the rate of discount at which it is appropriate to discount future cash proceeds be the same for all future years. If the appropriate rate of interest varies from year to year, then the two procedures may not give identical answers. It is easy to use the NPV method correctly. It is much more difficult to use the IRR method correctly. Accept or Reject Decisions Frequently, the investment decision...
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...manager is to decide which, if any, projects or investments opportunities the organization should undertake. The task of analyzing and comparing financials is a daunting task, but when utilizing the tools of capital budgeting, the process of this type of business decision making can be quite useful. This paper will define capital budgeting and discuss some of the components of this decision making tool. It will also discuss some of the concerns that go along with Capital Budgeting. The Basics of Capital Budgeting What is Capital Budgeting? Organizations looking to expand their business through asset acquisition create a capital budget (Paden, n.d.). Capital budgets exclusively are associated with real estate, equipment and other potential assets used to evaluate asset impact and the potential benefit to the organization. Capital Budgeting is the process in which a business determines whether a project or investment venture are worth pursuing. It is the process of analyzing investment opportunities and deciding which one to accept (Berk & DeMarzo, 2014). Potential ventures are evaluated and the potential expenditures or investments are ranked. Usually, these types of business decisions are for large purchases or investments. Steps of Capital Budgeting There are seven steps involved in capital budgeting (Hofstrand, 2013). They are: 1. Identify long-term goals of the organization 2. Identify potential investment prospects for meeting long-term goals identified...
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...20 | | 1.51 | 1.90 | Debt Management | Long Term Debt/Equity | 5.16 | 6.63 | | 0.00 0.00 | | | Total Debt/Equity | 6.16 | 8.96 | | 0.00 0.00 | | | Total Debt/Capital Employed | 5.52 | 7.91 | | 0.00 0.00 | | Profitability | Return on Equity | 25.92 | 26.48 | | 14.58 16.78 | | | Return on Capital Employed | 23.22 | 23.35 | | 14.21 16.37 | | | Return on Total Assets | 16.18 | 15.86 | | 11.63 13.60 | | | Operating Profit Margin | 8.28 | 8.84 | | 9.38 11.43 | | | Net Profit Margin | 7.14 | 7.43 | | 7.95 9.64 | | | | | | | | | Asset Management | Inventory Turnover | 54.64 | 50.35 | | 34.61 31.19 | | Investment Income Analysis | Dividend Payout | 95.74 | 73.06 | | 74.00 95.00 | | Liquidity Analysis Compare with 2011, Fairwood has a better result in 2012 for both current ratio and quick ratio. It is due to the increase in current assets and less current liability in 2012. It is safe for Fairwood to repay it's liability. Although Cafe de Carol gets an decrease in these both ratio, but they are still higher than Fairwood’s. Fairwood has a worse liquidity. Debt Management Analysis There is a much decrease in debt management ratio when comparing to 2011. It is because a huge amount of bank loan had been settled. It is a positive sign to decrease the risk of the company as the economy is unstable in 2012. It can reduce the risk of make a loss...
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...------------------------------------------------- New Heritage Doll Co. ------------------------------------------------- Capital Budgeting [Author] New Heritage Doll Company: Capital Budgeting In the case of the New Heritage Doll Company, Emily Harris, Vice President of the company’s production division, is in the process of reviewing and analyzing two capital budgeting proposals within her division. Both proposals intend to spur long-term growth and to strengthen the division’s innovative product lines. Based on various financial and logistical constraints, Harris would only be able to choose one of the projects. The first project, proposed by Marcy McAdams, involves expanding the Match My Doll Clothing Line (MMDC). The second project proposed by Elizabeth Holtz, aims to introduce customization to the existing doll line, Design Your Own Doll (DYOD). In order to correctly identify which project is more compelling and valuable, Harris needs to carefully evaluate the projects based on qualitative and quantitative metrics such as the NPV, payback period, IRR and how well each project is aligned with corporate goals and strategies. When comparing the value of two proposals within a division it is important to not only compare the net present value of the two, but to also consider how each project aligns with the company’s high-level strategies, core competencies and manufacturing capabilities. Unlike the DYOD proposal, MMDC has already established itself as a successful...
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...unrealistic). Using these figures, the appreciation on the equity, your down payment, would be 25% due to the leverage. A novice investor would feel like a real genius but we’re not looking at the right number. A common mistake is to discuss return on assets and return on equity without making a distinction between the two. In the example above, the return on equity is 25% but the return on assets is simply the appreciation on the house, or asset, which is 5%. Return on assets eliminates the effect of leverage, positive or negative, when a business uses debt financing – or when an individual does like in our mortgage example above. Debt financing is a necessary component of any efficient finance strategy but it creates an illusion by comparing...
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...educate shareholder A company’s financial conditions would be the major concern for shareholders. As a capital providers, shareholders depends on the company’s financial statements for knowing the company’s financial conditions each for both safety and profitability of their investments. Moreover, shareholders need to know where their money went, how it is spent and where is it now? The financial statements especially balance sheet confirms such query by providing specific information about a company’s asset investment. Thus, this will be educating the shareholders of Kenny Rogers in which how did they use the investment capital to earn revenues. * Shareholder’s equity care The financial statements, especially statement of shareholder’s equity exhibit an important information to shareholder because of the alteration in various equity components beginning with the starting capital and the events that made it increase and decrease. Ending components exhibits the company’s net worth. A fluctuating growth in a firm’s shareholder’s equity by way of decreasing the retained earnings, as opposed to smaller shareholder base. This means the reduction of investment returns for current equity shareholder. * Performance indicator Shareholder’s concern is also in the company’s management proficiency. Most shareholder will be comparing a firm’s management with another firm, or comparing from time to time. Shareholder nowadays is looking beyond financial indicators. A better company management...
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...is NPV an effective Investment appraisal tool? Capital Budgeting: To understand the value of NPV, the identification of its purpose in capital budgeting should be addressed beforehand, with its alternatives. This process of Capital Budgeting refers to the evaluation of potential in large scale business expenses and investments over long-term ventures. Often this step in the investment appraisal assessment, identifies the cashflows over the projects life-span, determining its generated returns in comparison to the organisations benchmark targets. (Book) Flowton’s options of replacing its older systems (Project A) or upgrading them to a centrally controlled platform (Project B) are considered such a venture. Ideally, Flowton would...
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...Return on year - end capital employed Comparing the ratios of return on year end capital employed that have been calculated for Venice ltd for 30th september 2010 which is 7.1% and for 30th september 2011 which is 11.21%, it has an increase of 4.11%. This increase in the percentage indicates the efficiency and profitability of Venice ltd capital investment have increase. From the Chief Executive's report of Venice's performance for year ended 30th september 2011, gross profit margin up from 16.7% to 20% and a doubling of the profit for the period. Also from the impact of purchasing of the net assets of roma company, gross profit and profits has a obvious increase of almost double of previous year, 2010. This suggest that there is an increase in profits have been earn from the investment the shareholders have made in Venice Ltd and definitely pleases the shareholders. This also means that the shareholders has more money to invest on Venice and venice ltd need not borrow so much money for investment. Net assets Net assets is the revenue of the company being generated over the share holders fund. Comparing the ratio of net assets that have been calculated for Venice Ltd for 30th september 2010 which is 1.6 and for 30th september 2011 which is 2.19, there is an increase of 0.59. From the Chief Executive's report, there is an increase in sales revenue of 30%. The increase of the ratio of the net assets is due to the increase in revenue of $70000000 in 2011...
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...challenges when allocating financial resources in the most productive way in accordance with government policies. The capital budget process in the public sector explores a variety of objectives to determine the best financial impact for the federal, state, and local government entities. The process chooses capital projects from a number of potential options based on several factors such as payback periods, internal rate of return, and the net present value for each project. Each factor should work together effectively to ensure the greatest return in the least amount of time. This paper will focus on determining the best financial outcome for a capital budget using these methods and calculations. To gain an understanding of the capital budget process, Project A and B will be analyzed to determine which project is best for a city council. The calculations will also help to justify each project and if both can be used simultaneously. 2 CRUNCHING NUMBERS Payback Period (Project A and B) The period for payback is the technique which is used measure the length of time that a project recoups the initial investment of the firm. Following the technique, the profits before depreciation (cash flow) is the amount of time required to repay an investment, while accumulating investment returns (Morrell, 2007). The shorter payback period is preferred because the investment costs are paid earlier allowing available funds for future use, in addition to less risk factor. According to Mikesell...
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...The Investment Detective The essence of capital budgeting and resource allocation is a search for good investments in which to place the firm’s capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital budgeting analyst is necessarily, therefore, a detective who must winnow good evidence from bad. Much of the challenges is knowing what quantitative analysis to generate in the first place. Supposed you are a new capital budgeting analyst for a company considering investments in the eight projects listed in Exhibit 1. The chief financial officer of your company has asked you to rank the projects and recommend the “four best” that the company should accept. Part I For the first part of this assignment only quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that projects 7 and 8 are mutually exclusive. All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. To simulate your analysis, consider the following questions: 1. Can you rank the projects simply by inspecting the cash flows? We cannot rank the projects by simply inspecting the cash flows. We must bring all cash flows at the same point in time (present) before comparing. This...
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...html Overview Any successful business owner is constantly evaluating the performance of his or her company, comparing it with the company's historical figures, with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of your company's effectiveness, however, you need to look at more than just easily attainable numbers like sales, profits, and total assets. You must be able to read between the lines of your financial statements and make the seemingly inconsequential numbers accessible and comprehensible. This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps you identify and quantify your company's strengths and weaknesses, evaluate its financial position, and understand the risks you may be taking. As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable. This discussion contains descriptions and examples of the eight major types of ratios used in financial analysis: Income, Profitability, Liquidity, Working Capital, Bankruptcy, Long-Term Analysis, Coverage, and Leverage. Outline: I. Purposes and Considerations of Ratios...
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...knowledge over the financing terms and methods to obtain requisite financing for the organization. One has to know the costs of financing as a prerequisite before selecting the proper financing sources. In this assignment, several advantages and disadvantages are discussed for different financing methods, cost of finance, financial planning and information and many other issues that help to gain a proper knowledge about the financing in organization. Different books and journals have been used to prepare the assignment. Contents Introduction 3 Requirement 1 3 Task 1.1 : Business needs finance and available sources of finance to a business 3 Equity financing 4 Debt Financing 4 Lease Financing 4 Task 1.2 : Accessing and comparing the implication of the different sources of finance 4 Implication of equity financing 4 Implication of debt financing 4 Implication of lease financing 5 Task 1.3: evaluation of the appropriate sources of finance for the above mention businesses. 5 M1: Critically evaluate each available sources of finance to that particular firm. Evaluation should include the pros and cons, and legal aspects of each source. (Merit M1). 5 Case study 1: An engineering firm 5 Equity financing for this firm 5 Debt financing 5 Lease financing 5 Case study 2: Individual financing 5 Equity financing for this firm 5 Debt financing 6 Lease financing 6 Case study 3: Large plc. 6 Equity financing for this firm 6 Debt financing 6 Lease...
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...Evaluating Performance 1. Introduction Choosing investments is just the beginning of your work as an investor. As time goes by, you’ll need to monitor the performance of these investments to see how they are working together in your portfolio to help you progress toward your goals. Generally speaking, progress means that your portfolio value is steadily increasing, even though one or more of your investments may have lost value. On the other hand, if your investments are not showing any gains or your account value is slipping, you’ll have to determine why and decide on your next move. In addition, because investment markets change all the time, you’ll want to be alert to opportunities to improve your portfolio’s performance, perhaps by diversifying into a different sector of the economy or allocating part of your portfolio to international investments. To free up money to make these new purchases, you may want to sell individual investments whose performance has been disappointing while not abandoning the asset allocation you’ve selected as appropriate. To assess how well your investments are doing, you’ll need to consider several different ways of measuring performance. The measures you choose will depend on the exact information you’re looking for and the types of investments you own. For example, if you have a stock that you hope to sell in the short term at a profit, you may be most interested in whether its market price is going up, has started to slide or...
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...308.1.8-05,12 The weighted average cost of capital for this company is 9.48%. Cost of capital is often used in net present value analysis as the discount rate, which is the rate that other investments would return that have similar risks. Cost of capital is the total of all of the actual costs of a company’s debts and equities. These costs include such factors as interest, tax expense, and equity costs. It is what percentage it costs the company to tie up its capital, so in order for an investment to be desirable, it must return a percentage greater than what it takes for the company to cover its capital costs. In a net present value analysis, the cost of capital is used to locate the factor from the present value table that will be multiplied by the cash flow to determine the present value of that cash flow. The present values of all of the cash flows will then be compared to the total investment to determine if it is an acceptable investment. If the present value is equal to or greater than the total investment, then the investment will likely be accepted. If the present value is less than the total investment, the investment should not be accepted. Cost of capital is used in the internal rate of return analysis by comparing the internal rate of return calculation to the cost of capital calculation. If the internal rate of return figure is equal to or greater than the cost of capital figure, then the investment is acceptable. If the internal rate of return...
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