Capital Budgeting Methods and Practices

This assignment delves into the world of capital budgeting, examining the methods and practices employed by companies to evaluate and select investment projects. It encourages a critical analysis of research papers exploring factors influencing capital budgeting decisions, including hurdle rates and risk adjustment techniques. The assignment aims to provide a comprehensive understanding of how companies approach long-term investment planning.

Running head: ACCOUNTING & FINANCE
Accounting & Finance
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Answer to Part A:............................................................................................................................2
Requirement 1:.............................................................................................................................2
Requirement 2:.............................................................................................................................4
Requirement 3:.............................................................................................................................4
Answer to PART B:.........................................................................................................................5
Introduction:................................................................................................................................5
Analysis of APN’s capital structure:...........................................................................................5
Computation of After-Tax WACC:.............................................................................................6
Analysis of financial ratio of APN:.............................................................................................6
APN outdoor group and its competitor performance:.................................................................6
Capital structure of APN Outdoor group:....................................................................................7
Conclusion:..................................................................................................................................8
References........................................................................................................................................9

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Answer to Part A:
Requirement 1:
Particulars 0 1 2 3 4 5 6 7 8
Initial Investment ($1,650,000)
Annual Cash Flow:
Incremental Revene $1,445,000 $1,589,500 $1,748,450 $1,923,295 $2,115,625 $2,327,187 $2,559,906 $2,815,896
Staff Cost ($900,000) ($954,000) ($1,011,240) ($1,071,914) ($1,136,229) ($1,204,403) ($1,276,667) ($1,353,267)
Material Costs ($210,000) ($222,600) ($235,956) ($250,113) ($265,120) ($281,027) ($297,889) ($315,762)
Marketing Costs ($46,000) ($48,760) ($51,686) ($54,787) ($58,074) ($61,558) ($65,252) ($69,167)
Other Costs ($25,000) ($26,500) ($28,090) ($29,775) ($31,562) ($33,456) ($35,463) ($37,591)
Depreciation of Lab ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250)
Net Profit before Tax $57,750 $131,390 $215,228 $310,455 $418,389 $540,493 $678,385 $833,859
Less: Tax on Profit ($17,325) ($39,417) ($64,569) ($93,137) ($125,517) ($162,148) ($203,515) ($250,158)
Net Profit after Tax $40,425 $91,973 $150,660 $217,319 $292,872 $378,345 $474,869 $583,701
Add: Depreciation $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250
Annual After-Tax Cash Flow $246,675 $298,223 $356,910 $423,569 $499,122 $584,595 $681,119 $789,951
Salvage Value $100,000
Net Annual Cash Flow ($1,650,000) $246,675 $298,223 $356,910 $423,569 $499,122 $584,595 $681,119 $889,951
Cumulative Cash Flow ($1,650,000) ($1,403,325) ($1,105,102) ($748,192) ($324,624) $174,499 $759,094 $1,440,213 $2,330,164
Payback Period
Required Rate of Return 16% 16% 16% 16% 16% 16% 16% 16% 16%
Discounted Cash Flow ($1,650,000) $212,651 $221,628 $228,657 $233,933 $237,639 $239,942 $241,000 $271,458
Cumulative Discounted Cash Flow ($1,650,000) ($1,437,349) ($1,215,721) ($987,064) ($753,131) ($515,492) ($275,550) ($34,549) $236,908
Discounted Payback period
Net Present Value
Profitability Index
4.65
7.13
$236,908
114.36%
Period
Capital Budgeting for Base-Case:

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Particulars 0 1 2 3 4 5 6 7 8
Initial Investment ($1,650,000)
Annual Cash Flow:
Incremental Revene $1,445,000 $1,531,700 $1,623,602 $1,721,018 $1,824,279 $1,933,736 $2,049,760 $2,172,746
Staff Cost ($900,000) ($990,000) ($1,089,000) ($1,197,900) ($1,317,690) ($1,449,459) ($1,594,405) ($1,753,845)
Material Costs ($210,000) ($231,000) ($254,100) ($279,510) ($307,461) ($338,207) ($372,028) ($409,231)
Marketing Costs ($46,000) ($50,600) ($55,660) ($61,226) ($67,349) ($74,083) ($81,492) ($89,641)
Other Costs ($25,000) ($27,500) ($30,250) ($33,275) ($36,603) ($40,263) ($44,289) ($48,718)
Depreciation of Lab ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250)
Net Profit before Tax $57,750 $26,350 ($11,658) ($57,143) ($111,073) ($174,526) ($248,703) ($334,939)
Less: Tax on Profit ($17,325) ($7,905) $3,497 $17,143 $33,322 $52,358 $74,611 $100,482
Net Profit after Tax $40,425 $18,445 ($8,161) ($40,000) ($77,751) ($122,168) ($174,092) ($234,457)
Add: Depreciation $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250
Annual After-Tax Cash Flow $246,675 $224,695 $198,089 $166,250 $128,499 $84,082 $32,158 ($28,207)
Salvage Value $100,000
Net Annual Cash Flow ($1,650,000) $246,675 $224,695 $198,089 $166,250 $128,499 $84,082 $32,158 $71,793
Cumulative Cash Flow ($1,650,000) ($1,403,325) ($1,178,630) ($980,541) ($814,291) ($685,792) ($601,710) ($569,552) ($497,760)
Payback Period
Required Rate of Return 16% 16% 16% 16% 16% 16% 16% 16% 16%
Discounted Cash Flow ($1,650,000) $212,651 $166,985 $126,907 $91,818 $61,180 $34,511 $11,378 $21,899
Cumulative Discounted Cash Flow ($1,650,000) ($1,437,349) ($1,270,364) ($1,143,457) ($1,051,638) ($990,458) ($955,948) ($944,569) ($922,671)
Discounted Payback period
Net Present Value
Profitability Index
Capital Budgeting for Worst-Case:
Period
10.34
50.13
($922,671)
44.08%

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Particulars 0 1 2 3 4 5 6 7 8
Initial Investment ($1,650,000)
Annual Cash Flow:
Incremental Revene $1,445,000 $1,661,750 $1,911,013 $2,197,664 $2,527,314 $2,906,411 $3,342,373 $3,843,729
Staff Cost ($900,000) ($927,000) ($954,810) ($983,454) ($1,012,958) ($1,043,347) ($1,074,647) ($1,106,886)
Material Costs ($210,000) ($216,300) ($222,789) ($229,473) ($236,357) ($243,448) ($250,751) ($258,274)
Marketing Costs ($46,000) ($47,380) ($48,801) ($50,265) ($51,773) ($53,327) ($54,926) ($56,574)
Other Costs ($25,000) ($25,750) ($26,523) ($27,318) ($28,138) ($28,982) ($29,851) ($30,747)
Depreciation of Lab ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250) ($206,250)
Net Profit before Tax $57,750 $239,070 $451,840 $700,904 $991,838 $1,331,058 $1,725,947 $2,184,998
Less: Tax on Profit ($17,325) ($71,721) ($135,552) ($210,271) ($297,551) ($399,318) ($517,784) ($655,499)
Net Profit after Tax $40,425 $167,349 $316,288 $490,633 $694,287 $931,741 $1,208,163 $1,529,498
Add: Depreciation $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250 $206,250
Annual After-Tax Cash Flow $246,675 $373,599 $522,538 $696,883 $900,537 $1,137,991 $1,414,413 $1,735,748
Salvage Value $100,000
Net Annual Cash Flow ($1,650,000) $246,675 $373,599 $522,538 $696,883 $900,537 $1,137,991 $1,414,413 $1,835,748
Cumulative Cash Flow ($1,650,000) ($1,403,325) ($1,029,726) ($507,188) $189,694 $1,090,231 $2,228,222 $3,642,635 $5,478,383
Payback Period
Required Rate of Return 16% 16% 16% 16% 16% 16% 16% 16% 16%
Discounted Cash Flow ($1,650,000) $212,651 $277,645 $334,768 $384,882 $428,757 $467,080 $500,461 $559,950
Cumulative Discounted Cash Flow ($1,650,000) ($1,437,349) ($1,159,704) ($824,936) ($440,054) ($11,297) $455,782 $956,244 $1,516,194
Discounted Payback period
Net Present Value
Profitability Index
Capital Budgeting for Best-Case:
Period
3.79
5.29
$1,516,194
191.89%
Requirement 2:
The decisions associated to the capital budgeting has been seen to include several
projections for the given scenario. The evaluations depicted above have been seen to be related
to the estimation of the various types of the free cash flow for the project. The application of the
other techniques has been evident with the inclusions of payback period and ARR which may
used to determine the risk in the project (Hall & Westerman, 2013).
Requirement 3:
The calculations projected above have been able to consider the various considerations
for the positive NPV and PI of 191.89%. The positive NPV has been further indicated with the

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project viable to be undertaken based on the considered investments. The Cost benefit ratio has
been discerned with the PI value of 191.89%, which has been recognized with future cash flow,
which is seen to be more than the initial investment amount considered by an organization. The
decision for the rejection and the acceptance has been observed with the consideration of Capital
budgeting technique like ARR and payback period (Batra & Verma, 2017).
Answer to PART B:
Introduction:
The preparation of the report has been seen with the APN outdoor capital structure which
has been seen to be duly listed in the ASX. The main consideration of the report has been further
seen to include the calculation based on the WACC and determination of the important financial
ratios for the organization.
Analysis of APN’s capital structure:
The WACC for APO has been calculated with an amount of 8.32%. The extra amount
has been discerned with $181.8 equity which has been considered with rising by APN in year
2016 for capital structure establishment. The Group has been further seen to intend the reduction
in cost of capital by maintaining a minimum amount of the capital structure. The total cost of
capital for APN can be further reduced by the increased proportion of the debt value. Based on
the annual report evaluation in the year 2016, the debt proportion in the capital structure has
decreased (Daunfeldt & Hartwig, 2014). The main rationale for this has been seen with the total
equity which has increased and the different types of the interest bearing liabilities has been seen
to be decreasing in nature. The total value of equity has increased considerably from $ 461525 in

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year 2015 to $ 836465 in the same FY. The D/E has been discerned as 38.1 in the year 2016 and
total debt of 27.61 (Nurullah & Kengatharan, 2015).
Computation of After-Tax WACC:
Particulars Amount Weightage Return Rate
Weighted
Return
Total Equity Capital $836,465 83.83% 8.38% 7.03%
Total Debt Capital $161,309 16.17% 11.42% 1.85%
Tax Rate 30%
After-Tax Weighted Average Cost
of Capital 8.32%
Computation of After-Tax Weighted Avergae Cost of Capital:
Analysis of financial ratio of APN:
The net operating cash flow for the entity has been decreased in the previous three years.
In the three years, the total amount of the earnings for the group has been identified as 19% less
than the target. This has been the case mainly for the strategic initiatives in the present year
which has been computed as 0.29. The decrease in the earnings per share has been evaluated as
44.4 in year 2015 to 31.4 in year 2016. The total P/E in 2017 has been observed as 16.92
(Durnev, Morck, & Yeung, 2004).
The liquidity positioning of the company has been discerned based on the cash ratio,
quick ratio and current ratio. The total amount of cash ratio for the company is 0.38 and current
ratio of 1.90 with 1.89 as the quick ratio. The total amount of interest coverage ratio is 25.96 and
the D/A for the same is 0.23 (Dellavigna & Pollet, 2013).

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APN outdoor group and its competitor performance:
Ooh Media is identified as one of the main rival of APN Outdoor group. The capital
structure for the organization has been seen to compose of borrowings and equity. The total
value of the equity has increased with the borrowings. The capital structure for the APN outdoor
has been considered with the combination of both debt and equity in the capital structure of the
company. Despite of this, the dependency in the equity is seen to be more than the debt value
(Li, Peng, & Li, 2015). The capital structure for APN has transformed with time for a period of
more than three years, but this has not increased as per the equity financing. Henceforth, the
capital structure for the organization has been identified with the mix of components for
financing the assets which are seen as debt as well as the equity. APN outdoor has changed over
the year, which is not increasingly related to the borrowing for the equity finance. Henceforth, it
can be said that the capital structure for both Ooh Media and APN Outdoor group has the same
mix of financing assets which is composed of both debt and equity. APN outdoor has been able
to experience a stronger cash flow which has been able to assist in investment funding activity
and favorable return to the shareholder (Baker & English, 2013).
Capital structure of APN Outdoor group:
The capital structure for the organization has been considered to be based on the various
types of the depiction which has been based on the equity and debts as capital for earning as an
alternative for the total value made for the investments with the equivalent risk. WACC is
directly imposed with the financial decision and any change in the capital structure has been
directly influenced as per the WACC. With a higher WACC, there will be increased market
value for the organization and vice versa. The increased value of the market is seen to be

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essential for the company to reduce the cost of capital (Brunzell, Liljeblom, & Vaihekoski,
2013).
The company has been able to decrease the cost of capital by increasing the funds based
on least costly source. The cost of capital may be reduced by the company through restructuring
of the capital which cannot exceed the rate of return. The lower amount for the cost of capital
will be able to fund new projects in a cheaper way. The reduction on the cost of capital can be
considered with formulation of new credit line and the common debt loan utilized for financing
the assets including the bank loan, card debt and bonds (Welch & Levi, 2013).
Conclusion:
The main analysis of the capital structure for APN comprise of equity and debentures. It
has been further seen that the company has been able to provide a satisfactory return for the
shareholders and the increased dividend for the shareholders. The earnings and the revenues
before taxed and interest has been seen with an upward trend in generating a satisfactory return
to the shareholders.

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References
Baker, H. K., & English, P. (2013). Capital Budgeting: An Overview. In Capital Budgeting
Valuation: Financial Analysis for Today’s Investment Projects (pp. 1–16).
https://doi.org/10.1002/9781118258422.ch1
Batra, R., & Verma, S. (2017). Capital budgeting practices in Indian companies. IIMB
Management Review, 29(1), 29–44. https://doi.org/10.1016/j.iimb.2017.02.001
Brunzell, T., Liljeblom, E., & Vaihekoski, M. (2013). Determinants of capital budgeting
methods and hurdle rates in Nordic firms. Accounting and Finance, 53(1), 85–110.
https://doi.org/10.1111/j.1467-629X.2011.00462.x
Daunfeldt, S.-O., & Hartwig, F. (2014). What Determines the Use of Capital Budgeting
Methods? Evidence from Swedish Listed Companies. Journal of Finance and Economics,
2(4), 12. https://doi.org/10.12691/jfe-2-4-1
Dellavigna, S., & Pollet, J. M. (2013). Capital Budgeting versus Market Timing: An Evaluation
Using Demographics. Journal of Finance, 68(1), 237–270. https://doi.org/10.1111/j.1540-
6261.2012.01799.x
Durnev, A., Morck, R., & Yeung, B. (2004). Value-enhancing capital budgeting and firm-
specific stock return variation. The Journal of Finance, 59(1), 65–105.
https://doi.org/10.1111/j.1540-6261.2004.00627.x
Hall, J. H., & Westerman, W. (2013). Basic Risk Adjustment Techniques in Capital Budgeting.
In Capital Budgeting Valuation: Financial Analysis for Today’s Investment Projects (pp.

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215–239). https://doi.org/10.1002/9781118258422.ch12
Li, H., Peng, J., & Li, S. (2015). Uncertain programming models for capital budgeting subject to
experts’ estimations. Journal of Intelligent and Fuzzy Systems, 28(2), 725–736.
https://doi.org/10.3233/IFS-141353
Nurullah, M., & Kengatharan, L. (2015). Capital budgeting practices: evidence from Sri Lanka.
Journal of Advances in Management Research, 12(1), 55–82.
https://doi.org/10.1108/JAMR-01-2014-0004
Welch, I., & Levi, Y. (2013). Long-Term Capital Budgeting. SSRN Electronic Journal.
https://doi.org/10.2139/ssrn.2327807