Project Evaluation and Capital Budgeting
Added on 2020-02-03
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ACCOUNTING AND FINANCE
TABLE OF CONTENTSINTRODUCTION.......................................................................................................................................3PART A.......................................................................................................................................................3Necessity to consider ethics in the capital budgeting process..................................................................3Part B...........................................................................................................................................................4Debt and equity ratio or capital structure.................................................................................................4Weighted average cost of capital.............................................................................................................43 Alternative capital structure to manage cost.........................................................................................5Part C...........................................................................................................................................................5(a)Payback period....................................................................................................................................5(b)Discounted payback period.................................................................................................................6© Net present value method....................................................................................................................6(d)Profitability index...............................................................................................................................7(e)Internal rate of return method..............................................................................................................8(f) Proposal acceptance............................................................................................................................8(g) Viability of project at 20% discount rate............................................................................................8CONCLUSION...........................................................................................................................................8REFERENCES............................................................................................................................................9
INTRODUCTIONCapital budgeting is the one of the most important technique that is used to select theproject. There are number of issues that are associated with the capital budgeting methods. In thecurrent report necessity to consider ethics in the capital budgeting process is explained in detail.Along with this, in middle part of the report weighted average cost of capital is computed. At endof the report cash budgeting method is used to evaluate the project and conclusion section isprepared. In this way research is carried out.PART ANecessity to consider ethics in the capital budgeting processThere is a necessity to consider ethics in the capital budgeting process. In the capitalbudgeting process first of all managers make projections about the cash flows. In this regardnumber of factors is considered for making projection about the cash flows. There are number ofstakeholders of the business firm that are associated with the capital budgeting process. Usuallyfirms issue equity to finance their capital project. In the annual report lots of information isprovided about the prospective project (Bierman and Smidt, 2012. If the capital budgetingprocess will not be implemented or performed in proper manner then wrong projections can bemade in respect to the project. Due to this reason it is possible that firm make investment in thewrong project. If same will happened then investor will loose their money on investment. Thus,it is very important for the business firm to follow all ethics while making projection in thecapital budgeting process. If accurate projection will be made then higher amount of return canbe given to the investor. In the capital budgeting process one has to make estimation about thecash flows that may be observed in the upcoming time period. In order to make projection rateestimation usually managers estimate the likely economic condition of the nation and likelyrevenue that can be generated by the project due to project demand (Gervais, Heaton andOdean, , 2011). Many times in order to obtain better results project managers use exaggeratedgrowth rate of cash flows to make projection. Due to this reason unviable project seems viable.Thus, there is probability that wrong project will be selected. If same will happened then
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