Financial Management and Capital Budgeting Report †Free Samples

Question: Discuss about the Financial Management and Capital Budgeting Report. Answer: The Budgeting Report Capital Budgeting is the comprehensive procedure of ascertaining the credibility of a project. The capital budgeting project helps the investors take a look at every corner, pros and cons of the project, which helps them in decision making procedure. This is a whole process of investment appraisal decision and helps the project mangers analyse the positive and negatives of a given project. (Dayananda, 2008) The calculations for the related project has been provided in the excel sheet. Considering the same the following report on capital budgeting decision have been made. The GM of RUNWELL corporation is here trying to make a decision about the acceptance or rejection of a project with eight year life. He has collected all relevant information related to the project and has laid down the cash flows from this assignment. Using this information we have calculated few parameters which will help him take decision for the project. (Herbst, 2003) Net Present Value (NPV): the net present value of a project is the difference between the present values of cash inflows from the project with the present values of the cash outflows. When the value of inflows are greater than the values of outflows, it indicates positive NPV, and also that the investor will earn more than what he invests at the given cost of capital (Jakhotiya, n.d.). This is the case of positive NPV and in such cases the project should be accepted. When the outflows are more than inflows, it is negative NPV and the project should not be accepted. In the given scenario we see that the company invests approximately $1.53 million and the present value of cash flows generated from the project are approximately $2.11 million (Kaufman, n.d.). This means that the project generates about $0.53 million of positive NPV for the company. Based on the net present value evaluation the project should be accepted. (Kumar, n.d.) Internal Rate of Return (IRR): the internal rate of return in the capital budgeting tool whereby the rate earned on the project id determined. The values of the cash inflows and outflows are equated and with the help of trial and error method and interpolation, the rate of return on the project is calculated. (Pandey, 2015) In the given case we see that the IRR of the project amounts of approximately 23.35%, whereas the cost of capital of the project is 14%. This indicates that the return on the project is way more than the cost of the project. Therefore based on internal rate of return evaluation the project should be accepted since it earns more than what is to be expended on the project. (Paramasivan and Cuppiraman?iyan?, 2009) Pay-back period: this is the capital budgeting tool whereby the investors can help understand -the time in which there invested amount will be recovered. The pay-back period helps us understand the real duration of the project. Lower the period better I for the investors. In the given scenario we see that the pay-back period of the project amounts to approximately 3.97 years. The duration of the project if 8 years, and the investment amount is recovered by the management in 3.97 years. Therefore, we can say that the pay-back period of the company is efficient and the project should be accepted. (Peterson and Fabozzi, n.d.) Discounted Pay-Back Period: the discounted pay-back period is same as the pay-back period, except for the fact that the cash flows used in calculation of discounted pay-back period are the discounted cash flows, whereas those in normal pay-back periods are normal cash flows. Since the discounted values are used, the span in discounted pay-back period is higher than that of normal pay-back period. The discounted pay-back period of the project amounts to approximately 5.61 years and the span of the project are eight years. Also it has been provided that the managements desires of a discounted pay-back period of 5 years. We see that the discounted pay-back period of the project is slightly more than the managements expectations. Therefore, based on this parameter the project cannot be accepted, since the discounted pay-back period is more than the managements expectations. (Sofat, 2016) Therefore, based on all the above tools of capital budgeting we see that, the project seems viable to be accepted, except for the discounted pay-back period, which is slightly more than managements expectations. If the management can adjust its expectations of the discounted pay-back period then the project seem viable o be accepted from each point of view. (Wilkes, n.d.) The GM of the company is unsure for this project due to unexpected growth in the car manufacturing industry. In order to be sure of the project, the GM should study the reasons and factors which have contributed in this sudden increase in growth of car manufacturing industry. If according to his study and research the factors are expected to continue then he should accept the project and start with it, if not then the project should be rejected. We see that the GM has an option to sell this project to an outside contractor for $200,000. As per our calculations we see that the project is expected to generate a value of $581,357. This expected value is more than the sale price of the project. If the factors and cash flows move as expected in future, then the GM should accept the project himself and execute it independently instead of selling to the outside contractor. This way the company will generate more benefits. The weighted average cost of capital is a complex calculation and includes a lot of factor in its calculation. Having a wrong estimate of WACC can be very harmful for the company. Therefore a good research and data is required in calculations of the WACC for a given project. in the given case see that the company has taken the WACC to be 14%, the GM wants to increase the WACC for the risk of the contractor. But we see that the project plan for RUNWELL has been planned really well and is expected to generate high returns for the given investments. Therefore, we see that taking all the factors into consideration, the project seems viable to be accepted. The GM should go for the project with all this information. References Dayananda, D. (2008).Capital budgeting. 1st ed. New York: Cambridge University Press finance. Herbst, A. (2003).Capital Asset Investment. 1st ed. Chichester: John Wiley Sons. Jakhotiya, G. (n.d.).Strategic financial management. 1st ed. London: Sangam Books Ltd. Kaufman, M. (n.d.).The Capital budgeting handbook. 1st ed. Homewood, Ill.: Dow Jones-Irwin. Kumar, R. (n.d.).Strategic financial management casebook. 1st ed. Pandey, I. (2015).Financial management. 1st ed. New Delhi: Vikas Publishing House PVT LTD. Paramasivan, C. and Cuppiraman?iyan?, T. (2009). Financial management. 1st ed. New Delhi: New Age International (P) Ltd., Publishers. Peterson, P. and Fabozzi, F. (n.d.).Capital budgeting. 1st ed. New York, NY: Wiley. Sofat, R. (2016).Strategic financial management. 1st ed. [Place of publication not identified]: Prentice-Hall Of India. Wilkes, F. (n.d.).Capital budgeting techniques. 1st ed. Chichester: J. Wiley.