DECK ROMANIA CASE ANALYSES 2
Student #: 1480510
Introduction
Capital budgeting is the most important management tool that enables managers of the organization to select the investment option that yields comprehensive cash flows and rate of return. For managers availability of capital whether in form of debt or equity is very limited and thus it become imperative for them to invest their limited and most important resource in perfect option that could prove to beneficial for the organization in the long run (Hickman et al, 2013). However, while using capital budgeting tool managers must understand its quantitative and qualitative considerations that are discussed below.
Independent project If an organization decides to invest in an independent product will not affect the performance of other project of the company, and acceptance, or rejection of this project will not prevent management to invest in other projects. For example, an organization wants to expand its product line by introducing a new product in the market, and at the same time, organization is planning to replace an existing machine with a machine that has the capability of produce-diversified project simultaneously (Harris & Raviv, 1996). In this scenario, organization can select both the projects depending on the financial performance, and investment criteria. For decision that is more effective organization can use capital budgeting tool like NPV, IRR, PBP, to analyze their value before deciding to accept or reject the projects.
Tools of Capital budgeting
Investing decision is very risky and profitable and because of that organization are observed to conducting proper analyzing before reaching an investment decision. for this purpose organization are observed of using several tools, but majority of the organization use tools of capital budgeting mainly because of their reliability, and accuracy. Some of the most useful tools of capital budgeting are briefly discussed below.
Payback period method
Introduction
Capital budgeting is the most important management tool that enables managers of the organization to select the investment option that yields comprehensive cash flows and rate of return. For managers availability of capital whether in form of debt or equity is very limited and thus it become imperative for them to invest their limited and most important resource in perfect option that could prove to beneficial for the organization in the long run (Hickman et al, 2013). However, while using capital budgeting tool managers must understand its quantitative and qualitative considerations that are discussed below.
Independent project If an organization decides to invest in an independent product will not affect the performance of other project of the company, and acceptance, or rejection of this project will not prevent management to invest in other projects. For example, an organization wants to expand its product line by introducing a new product in the market, and at the same time, organization is planning to replace an existing machine with a machine that has the capability of produce-diversified project simultaneously (Harris & Raviv, 1996). In this scenario, organization can select both the projects depending on the financial performance, and investment criteria. For decision that is more effective organization can use capital budgeting tool like NPV, IRR, PBP, to analyze their value before deciding to accept or reject the projects.
Tools of Capital budgeting
Investing decision is very risky and profitable and because of that organization are observed to conducting proper analyzing before reaching an investment decision. for this purpose organization are observed of using several tools, but majority of the organization use tools of capital budgeting mainly because of their reliability, and accuracy. Some of the most useful tools of capital budgeting are briefly discussed below.
Payback period method
References: Dayananda, D, Irons, R, and Harrison, S, Herbohn, J, and Rowland, P, (2002). “Capital budgeting: Financial, appraisal, of investment project”, Cambridge university press, pp. 5-10. Data retrieved from http://assets.cambridge.org/97805218/17820/excerpt/9780521817820_excerpt.pdf on February 16 2013 Dutta, S., & Fan, Q. (2012). Incentives for innovation and centralized versus delegated capital budgeting. Journal of Accounting and Economics, 53(3), 592-611. Data retrieved from http://www.haas.berkeley.edu/faculty/papers/fan_delegation.pdf on June 23 2013 Harris, M, and Raviv, A, (1996). “The capital budgeting process: Incentives and information”, the journal of finance, vol. 51, pp. 1139-1174. Data retrieved from http://www.econ.sdu.edu.cn/20E90B16-90DE-40D8-A451-50BA5D8E7722/FinalDownload/DownloadId-A6ABC0E7D9896E5EFE2149B490BFD4A2/20E90B16-90DE-40D8-A451-50BA5D8E7722/jrtzx/uploadfile/pdf/corporatefinance/23.pdf on February 16 2013 Hickman, K. A., Byrd, J. W., and McPherson, M. (2013). “Essentials of finance”. San Diego, CA: Bridgepoint Education Inc Hornstein, A. S., & Zhao, M. (2011). Corporate capital budgeting decisions and information sharing. Journal of Economics & Management Strategy, 20(4), 1135-1170. data retrieved from http://www.researchgate.net/publication/227374813_Corporate_Capital_Budgeting_Decisions_and_Information_Sharing/file/79e415080c870ebaad.pdf On June 23 2013 Megginson, L, W, Smart, S, and, Luccey, M, B, (2008). “Introduction to corporate finance”, South western cengage learning, USA. Data retrieved from http://books.google.com/books?id=wXqibnOslSgC&pg=PA282&dq=capital+budgeting+process+pdf&hl=en&sa=X&ei=OKIeUc7ELcbDtAaV_IGwAg&ved=0CFUQ6AEwBg#v=onepage&q=capital%20budgeting%20process%20pdf&f=false on February 16 2013 Peterson, P, P, and Fabozzi, J, F, (2002). “Capital budgeting: Theory and practice”, John Wiley and Sons inc, USA. Data retrieved from http://books.google.combooks?id=eW_rmXkRDg0C&printsec=frontcover&dq=Capital+Budgeting:+Financial+Appraisal+of+Investment+Projects&hl=en&sa=X&ei=DqEeUb6bLoKmtAaXioHYDA&ved=0CDkQ6AEwAg#v=onepage&q&f=false on February 16 2013