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Project on Capital Budgeting Tools and Methods

   

Added on  2020-06-04

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CAPITAL BUDGETING
Project on Capital Budgeting Tools and Methods_1

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1QUESTION 1...................................................................................................................................1Comment on items listed in Exhibit 1.........................................................................................1QUESTION 2...................................................................................................................................2Incremental cash flow table........................................................................................................2QUESTION 3...................................................................................................................................5Capital budgeting tools for MAKE option..................................................................................5Capital budgeting tools for BUY option.....................................................................................6Suggestions for undertaking project on the basis of above investment evaluation tools............8QUESTION 4...................................................................................................................................9Sensitivity analysis of NPV for MAKE option...........................................................................9Sensitivity analysis of NPV for BUY option............................................................................10QUESTION 5.................................................................................................................................12For MAKE option.....................................................................................................................12For BUY option........................................................................................................................12QUESTION 6.................................................................................................................................13Break even cash flow for MAKE option...................................................................................13Break even cash flow for BUY option......................................................................................14QUESTION 7.................................................................................................................................15QUESTION 8.................................................................................................................................16CONCLUSION..............................................................................................................................16REFERENCES..............................................................................................................................17
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INTRODUCTIONCapital budgeting is one of the important and widely considered tool by the projectmanagers in order to make effectual business decisions. The reason is that, it helps to compareand take decisions that which one project will be the most profitable for the workingenvironment. The study is based on Delaware Pipe which owner is Philip Walker and going toundertake new project. In this, owner going to produce 10-in and 12-in pipes on the basis ofinterest of various distributors. When he will produce such both kinds of pipes then profitable intwo ways like preventing expenses and assisting problems of staff. The present project showsabout the calculation of various capital budgeting tools and methods for net cash flows estimatedin the incremental cash flow table. Apart from this, in order to make effective decisions forundertaking the project in Delaware Pipe company, base of NPV, IRR and PI calculations istaken into account. QUESTION 1Comment on items listed in Exhibit 1In the present case scenario basically three conditions are provided which are like worst,most likely as well as the best. In this, accountant of Delaware Pipe company used situation ofthe most likely where annual sales is worth of 1.65 million. This figure of revenue is consideredat the higher value which can affect to the decision making in order to undertake the project.Further, all the items are providing information about the expenses only to the accountant whichare adequate. Apart from expenses data related to the incomes are also required in order to assessviability of the project. However, given data and information in the Exhibit 3 are not consideringto the probability which also plays a major role. The reason is that, on the basis of probabilitiesfuture scenario of conditions of the project can be easily and clearly assumed (Chow andTeicher, 2012). Henceforth, the provided data is not sufficient which lead to create impact ofeffective decision making. As the probabilities level are not undertaken in the project thentranspire to cash flows as well as net present value in a negative direction. Moreover, it can besaid that information provided in the Exhibit 3 are sufficient up to the certain level. Therefore,the accountant should work upon it and consider effective strategies for estimating data in orderto perform calculation of Net Present Value (NPV).
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The costs associated with the new project will help to generate extra income in thecompany. For example: if number of labour increases then direct labour costs as well which leadto produce more pipes in the Delaware firm. When these all the mentioned expenses come intoconsideration then generate sales in whether direct or indirect manner. Therefore, it notconsidered under the sunk costs due to having nature of recovering. Apart from this, whenWalker produce 10-in and 12-in pipes in the firm instead of 3-in., 6-in. and 8-in. Pipes then hasopportunity to gain extra income. The reason is that distributors demanding 10-in and 12-inpipes. Hence, it can be said that expenses related to the new project are an opportunity cost forthe Delaware Pipe company. Sr. NumberName of costsType of costs1Raw materialsOpportunity cost because it leads manufacture 10-in and 12-in pipes2Distribution costOpportunity cost because it leads to generate sales3Direct labourOpportunity cost4Indirect labourOpportunity expense for the firm 5On costsOpportunity cost6UtilitiesOpportunity expenditures 7Repairs and maintenanceSunk cost which cannot be recovered8SpaceSunk expenditures9General factoryOpportunity cost10DepreciationSunk cost which applied on fixed assets11Less interestSunk cost for Delaware company due to nothaving nature recoverableQUESTION 2Incremental cash flow tableWhen a company operate in new project or next year then additional incomes and costsgenerated which considered as the incremental value. As level of revenue and expenses declinethen it can be said that incremental cash flow is lower and vice-versa (Lakew and Rao, 2015). At
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