Tag: capital budgeting

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Employing Capital Budgeting and Risk

Employing Capital Budgeting and Risk

Part A

 

Employing Capital Budgeting and Risk

These resources will help you to complete this discussion:

  • Nockolas, S. (2015). How do you calculate payback period using Excel? Retrieved from https://www.investopedia.com/ask/answers/051315/how-do-you-calculate-payback-period-using-excel.asp
  • Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill.
    • Chapter 9, “Risk Analysis, Real Options, and Capital Budgeting,” pages 262–286. The concept of risk is introduced in this chapter.
  • Sham, G. (n.d.). Capital budgeting: Wrapping it all up. Retrieved from https://www.investopedia.com/university/capital-budgeting/conclusion.asp

Risk is an important aspect of business and investment. The impact of risk needs to be measured on all capital projects and investments. In fact, most accomplished investors consider the measure and management of risk to be more important than the consideration of investment return. If risk is considered effectively, the returns will tend to take care of themselves.

To gain a full understanding of the impact of risk on the success or failure of capital projects, you can see the different views of risk and that all should be considered. For this discussion, you are a financial analyst of a mid-sized corporation, and the CFO has come to you with a pet investment project. The CEO has done a preliminary analysis using NPV, IRR, payback period, and PI, and it appears to be a worthy project that should add significant value to the firm. However, the CFO has a feeling that the CEO has failed to incorporate risk into the analysis. He has asked you do some risk analysis of the project to see if that will alter the final decision to invest or not.

Prepare a post that responds to these questions:

  • What type of risk analysis would you incorporate into your analysis?
  • How reliable are these analyses?

Make sure you provide examples and resources to support your statements.

Part B

Evaluation of Capital Projects

Introduction

This assignment is about one of the basic functions of the finance manager, which is allocating capital to areas that will increase shareholder value and add the most value to the company. This means forecasting the projected cash flows of the projects and employing capital budgeting metrics to determine which project, given the forecast cash flows, gives the firm the best chance to maximize shareholder value. As a finance professional, you are expected to:

  • Use capital budgeting tools to compute future project cash flows and compare them to upfront costs.
  • Evaluate capital projects and make appropriate decision recommendations.
  • Prepare reports and present the evaluation in a way that finance and non-finance stakeholders can understand.

Scenario

Senior leadership has now called upon you to analyze three capital project requests based on forecasted cash flow as they relate to maximizing shareholder value.

Your Role

You are one of Maria’s high-performing financial analyst managers at ABC Healthcare Corporation and she trusts your work and leadership. Senior leadership was impressed with your presentation in the Unit 2 assignment and they are tasking you with the analysis of these three proposed capital projects based on forecasted cash flow. You have completed forecasting the projected cash flows of the projects as reflected in the attached spreadsheets. You now need to conduct your analysis recommending which will provide the most shareholder value to the organization.

Requirements

  • Use capital budgeting tools to compute future project cash flows and compare them to upfront costs. Remember to only evaluate the incremental changes to cash flows.
  • Employing capital budgeting metrics, determine which project, given the forecast cash flows, gives the organization the best chance to maximize shareholder value.
  • Demonstrate knowledge of a variety of capital budgeting tools including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The analysis of the capital projects will need to be correctly computed and the resulting decisions rational.
  • Evaluate capital projects and make appropriate decision recommendations. Accurately compare the indicated projects with correct computations of capital budgeting tools and then make rational decisions based on the findings.
  • Select the best capital project, based on data analysis and evaluation, that will add the most value for the company. Provide a rationale for your recommendations based on your financial analysis.
  • Prepare reports and present the evaluation in a way that finance and non-finance stakeholders can understand.

 

Project A: Major Equipment Purchase
  • A new major equipment purchase, which will cost $10 million; however, it is projected to reduce cost of sales by 5% per year for 8 years.
  • The equipment is projected to be sold for salvage value estimated to be $500,000 at the end of year 8.
  • Being a relatively safe investment, the required rate of return of the project is 8%.
  • The equipment will be depreciated at a MACRS 7-year schedule.
  • Annual sales for year 1 are projected at $20 million and should stay the same per year for 8 years.
  • Before this project, cost of sales has been 60%.
  • The marginal corporate tax rate is presumed to be 25%.

 

 

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Managing 2: Marketing and Finance

Marketing and Finance

 Managing 2: Marketing and Finance

B629 

(The answers are indicative. Students may attempt to formulate their answers in a different way as long as they show good understanding of the theories).

In order to conduct your analysis, pick an organization, as specified in each the questions below. Pick an organization about which you can obtain information.

The TMA aims to assess your understanding of the core concepts of marketing. This assignment tackles different dimensions of the concepts of management. The ultimate purpose of this TMA is to allow you to develop your ability to use the conceptual frameworks, theories, practices, models and tools that you have studied in B629 and hence to apply them to real situations.

This TMA has two questions.

Word limit for the TMA: 1600 words +/- 10%. Elaborate discussion and link between accurate, well-founded theoretical frameworks and their real, practical applications in the selected; this should be clearly highlighted. You are also expected to refer to external references to provide more evidence in support of your discussion. The questions in this assignment are about different concepts of marketing in relation to the selected organization.

Your discussion needs to be provided in an essay format (introduction, body and conclusion). You have to provide comprehensive discussion/analysis in your answer, and not only description.
Higher marks will be awarded to work that:

  • uses the example company to illustrate key points rather than just describe what it did. Descriptive answers will receive lower marks,
  • uses a range of scholarly articles to support the key points, or to develop its arguments,
  • addresses both parts of the question more or less equally,
  • uses correct in-text citations and a correct table of references,
  • is well-written in an essay style,
  • has a conclusion which addressed the question directly,
  • is within 10% of the word limit.

QUESTIONS

Question 1 (50 marks)

Explain how managers in a selected organization deal with fairness and satisfaction to accomplish mutually satisfactory exchange between the organization and its customers or stakeholders. Discuss some of the issues and options the customers might face when they think they are not getting a fair deal in this exchange.  Support your answer with relevant examples. (800 words)

Question 2 (50 marks)

Considerations of fairness, power and satisfactory exchanges bring us to the question of ethics in marketing. Discuss the extent to which fairness or justice are considered key questions raised by ethics, and what that means in practice. Explain the degree to which using commonly applied ethics theories in marketing – i.e. utilitarianism, deontology and virtue ethics – is challenging to a selected organization when facing and tackling an ethical dilemma. Support your answer with relevant examples. (800 words)

GENERAL INSTRUCTIONS FOR STUDENTS

  1. Cut-off date: If you feel that you are unable to meet the cut-off date of the TMA because of unusual circumstances, please contact your tutor as soon as possible to discuss a possible extension to the cut-off date. The exact cut-off date will be assigned in due time.
  1. Course material:
  • Chapter: 1. Students can refer to other course material if needed.
  1. Format: Report presentation and structure, and PT3 Form. You are expected to write your answers in essay format. You may, however, use bullet points, diagrams, tables, or any graphs to support your arguments. Failing to do so could result in grade deduction from presentation marks up to 5 marks.
  2. Plagiarism: It’s imperative that you write your answers using your own words. Plagiarism will be penalized depending on its severity and according to AOU plagiarism policy (Enclosed after these instructions you will find the University rules of cheating and plagiarism).
  3. Word count: 1600 words +/- 10%. Not adhering to specified word count could result in grade deduction from word count marks up to 5 marks.
  1. Referencing: You are expected to use the Harvard referencing style for in-text referencing and list of reference at the end. Failing to do so could result grade deduction of referencing marks up to 10 marks.  In addition, although text books assigned in the course may be used freely as references, you are required to use a minimum of 2 external sources. It is recommended that you use scholarly studies found in the E-library link at the LMS.

 

The University Rules about Plagiarism

 

The University Definitions of cheating and plagiarism

According to the University By-laws, “The following acts represent studies of cheating and plagiarism:

  • Verbatim copying of printed material and submitting them as part of TMAs without proper academic acknowledgement and documentation.
  • Verbatim copying of material from the Internet, including tables and graphics.
  • Copying other students’ notes or reports.
  • Using paid or unpaid material prepared for the student by individuals or firms.
  • Utilization of, or proceeding to utilize, contraband materials or devices in examinations.”

Examples of Plagiarism

Copying from a single or multiple sources, this is where the student uses one or more of the following as the basis for the whole, or a good part, of the assignment:

  1. Published or unpublished books, studies or reports
  2. The Internet
  3. The media (e.g.TV programmes, radio programmes or newspaper studies)
  4. An essay from an essay bank
  5. A piece of work previously submitted by another student
  6. Copying from a text which is about to be submitted for the same assignment