Capital Planning: Costs and Benefits Analysis

This report discusses the costs and benefits analysis of capital planning, focusing on net present value and internal rate of return. It provides insights into the performance of in-house and outsourcing departments and recommends the selection of the in-house department based on the net present value and internal rate of return. The report includes cost breakdowns, benefits analysis, and calculations of net present value and internal rate of return.

Running head: ACCOUNTING INFORMATION SYSTEM
1
ACCOUNTING INFORMATION SYSTEM

ACCOUNTING INOFRMATION SYSTEM 2
Capital planning is one of the systems that are utilized to not just to quantify the
execution of the capital budgeting techniques, in addition it also assist the management to make a
choice on the basis of the various criteria. Now and again there are distinctive strategies which
are utilized by the administration so as to be the certain whether the proposition will be
acknowledged or dismissed. The distinctive strategies incorporate the Net present value, internal
rate of return, and profitability index as well. This report talks about the costs of the two
departments and the benefits associated with it. The summary has been depicted along with the
graphs (Hopkinson, 2017).
This report significantly centers on net present value and internal rate of return for the in
house advancement office and the re-appropriating division. There are diverse costs that have
been dissected for the in house advancement and the re-appropriate division which can be
bifurcated beneath.
Cost for in-house development 2016 2017 2018 2019 2020
Production Hardware 251000 - - - 75000
Employee salary 240000 264000 290400 319440 302540
Skill building and Development 55200 52300 58754 48227 30256
Communication 25890 26741 26556 16516 14595
Rental 12000 13500 13780 14230 12230
Contingencies and liabilities 17222 16554 18263 15749 12352
Manufacturing Software 317000 - - - 50000
Project total costs for the year 918312 373095 407753 414162 496973
Total Project costs
261029
5
The benefits on the other hand have been categorized on the basis of the confidence factor.
Benefits 2016 2017 2018 2019 2020
Outsourcing 331740 335620 332966 350174 325469
Supply chain Costing 65000 96850 99400 102365
Sales and revenue 243560 248596 250500 252741 245185
Legal and Professional fees 6233 6233 6233 6233 6233
Total benefits of the project' 581533 655449 686549 708548 679252
Confidence factor 100% 86% 92% 85% 88%
Benefits claimed as a
percentage 581533
563686.
1
631625.0
8
602265.
8
597741.
8

ACCOUNTING INOFRMATION SYSTEM 3
Project's total benefit
297685
2
Apart from this the outsourcing department has its own costs and the benefits are claimed
with the same confidence factor.
After calculating the costs the company has decided to opt for the capital budgeting
techniques namely the Net present value and the internal rate of return. The net present value of
the in-house department and the outsource department have been calculated and presented below
in the form of the table.
PARTICULARS In house Outsource
Net present value 1875545 1750036
IRR 28% 22%
Generally the net present value is calculated in order to have an idea of the present value
of the future cash flows. The net present value of the company depicts the difference between the
cost of the project and the sum of the annual cash flows for the particular period. This method is
useful as it clearly determines whether the project shall be accepted or rejected (Hussain, 2015).
In house
Outsource
1680000
1700000
1720000
1740000
1760000
1780000
1800000
1820000
1840000
1860000
1880000
Net present value

ACCOUNTING INOFRMATION SYSTEM 4
As can be seen from the table, the net present value of the in house department is
$1875545 and $1750036 is for the outsource department. The analyses are done to advise which
department is performing better and whether it shall continue or not. The net present value on the
basis of the cumulative cash flows and it is positive. The out sourcing department also has the
positive NPV yet the first choice of the company is the in-house operations. Therefore from the
above analysis it can be concluded that on the basis of the net present value the in house
department shall be selected (Hopkinson, 2017).
28%
22%
IRR
In house
Outsource
The second techniques used by the company for the evaluation of the project are internal
rate of return. The internal rate of return is basically the measurement of setting the net present
value of all the flows from the investment equal to zero. It has the feature of normalizing the
returns and at the same time this concept considers the time value of money, hence the internal
rate of return is used as the method to value the projects (Santandrea, Sironi, Grassi & Giorgino,
2017).
The internal rate of return of the in-house department is 28% and that of the outsource
department is 22%. Usually the higher internal rate of return is preferred as it implies the high
profit percentage on the present cash flows. The potentiality of the project can be seen in the in-
house department as aster observing the cash flows it has more opportunity to deliver the return
to the company (Ng & Beruvides, 2015).

ACCOUNTING INOFRMATION SYSTEM 5
From the overall analysis it can be stated that the in house department is performing
outstandingly and shall be chosen as the first choice of the company for growth returns. The
benefits will be realized in the smooth manner in case of the IN-HOUSE PROPOSAL.

ACCOUNTING INOFRMATION SYSTEM 6
References
Hopkinson, M. (2017). Net Present value and risk modelling for projects. Routledge.
Hussain, S. A. (2015). Net Present Value Criterion. Wiley Encyclopedia of Management, 1-2.
Ng, E. H., & Beruvides, M. G. (2015). Multiple internal rate of return revisited: frequency of
occurrences. The Engineering Economist, 60(1), 75-87.
Santandrea, M., Sironi, A., Grassi, L., & Giorgino, M. (2017). Concentration risk and internal
rate of return: Evidence from the infrastructure equity market. International Journal of
Project Management, 35(3), 241-251.