Capital Financing and Project Appraisal Techniques

Business Finance
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Contents
Introduction................................................................................................................................3
Scenario 1- Capital acquisition..................................................................................................4
Scenario 2- Project proposal......................................................................................................6
A. NPV, IRR and Payback period..........................................................................................6
B. The justification for using a correct discount rate.............................................................9
C. Advantages and disadvantages of each method.................................................................9
D. Factors to consider while accepting a project..................................................................11
Scenario 3- Project financing...................................................................................................12
A. Calculation of WACC.....................................................................................................12
B. Use and limitations of WACC.........................................................................................13
Conclusion................................................................................................................................15
References................................................................................................................................16
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Introduction
This report can be considered as a management report as it has been described in various
activities that the business manager is required to conduct during the production of goods and
services. Capital financing is one of the most essential parts of business management as it
helps in providing cost efficient to the source of financing for business operations. It is very
important that overall benefits achieved through capital financing are exceeding the overall
cost of capital. This report will discuss critical information that will be required in making
capital acquisition decisions according to a given scenario. This report will also use different
capital appraisal techniques for evaluating the financial viability of a particular project
presented such as net present value, payback period method and internal rate of return
(Peirson et.al, 2014). In addition to that theoretical aspect of this method will also be
discussed in this report. At last cost of capital for a particular scenario will be calculated
which is called a weighted average cost of capital. The main objective of this report is to
evaluate the practical and theoretical aspects of capital financing.
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Scenario 1- Capital acquisition
In the given scenario a request of replacing a particular part of the equipment is presented.
The details provided in relation to spare part and reason for replacement is very limited as the
team member is assuming that the request will be approved automatically. This type of
practices was very common before the predecessor was in-charge of equipment acquisition.
This type of practice can be very harmful for the financial position of the company (Lengu,
Syntetos and Babai, 2014). It is important that proper requisition is made in case there is a
requirement for new equipment or part of the equipment. Machinery used in business
organizations are very costly and it is important to conduct financial viability analysis before
making any decision in relation to such equipment. Following are some of the information
that should be provided by a team member before making replacement request for part of
equipment-
Details of the spare part
First and foremost detailed information in relation to a spare part should be provided by the
team member. This information should include details in relation to model number, nature of
machinery, the procedure of machinery, the name of the manufacturer, expected cost etc.
This type of information is necessary because this information will be helpful in making sure
that spare part of the machinery is still available in the market. This information will also be
helpful in case manager is required to make inquiries in relation to price and quality of the
spare part (Hu et.al, 2018).
The expected life of the machinery
It is already discussed to that the cost of spare parts in machinery can be very expensive,
therefore it is important to evaluate whether it would be more efficient to purchase new
machinery or to replace the spare part. For example, if the life of the machinery is only one
year then it would not be very beneficial for the organization to purchase very costly spare
part of such machinery (Gu, 2013). Instead, management of the company can purchase new
machinery which would have a new life as a company has to incur this cost next year. In such
scenario the expenditure incurred by the company on purchase of spare part will be of no
beneficial value as the spare part will have no use in the business and resale value would not
be able to cover the overall cost of the spare part (Driessen et.al, 2015). Identifying the
expected life of messenger will also help in making decisions in relation to purchasing of a
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