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Ethics in Capital Budgeting Process - Report

   

Added on  2020-01-07

9 Pages1645 Words195 Views
ACCOUNTING AND FINANCE

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3Part A...............................................................................................................................................3Necessity to consider ethics in the capital budgeting..................................................................3Part B...............................................................................................................................................4Debt and equity ratio or capital structure....................................................................................4Weighted average cost of capital.................................................................................................4Part C...............................................................................................................................................6(a)Payback period........................................................................................................................6(b)Discounted payback period.....................................................................................................6© Net present value method........................................................................................................7(d)Profitability index...................................................................................................................8(e)Internal rate of return method..................................................................................................8CONCLUSION................................................................................................................................9REFERENCES..............................................................................................................................10Table 1Computation of cost of capital.............................................................................................4Table 2Calcualtion of enterprise value............................................................................................4Table 3Weighted average cost of capital.........................................................................................5Table 4Calculation of payback period.............................................................................................6Table 5Disocunted payback period.................................................................................................6

INTRODUCTIONProject heavily affect the business firm because implementation of same lead to revenuegeneration in the business. In the current report necessity to consider ethics in the capitalbudgeting process are explained in detail. Along with this, in the report calculation in respect toestimation of cost of capital is performed by following specific model and on that basis discountrate is estimated. At end of the report, project evaluation method is applied on the cash flows anduseful meanings are deduced on the basis of received results. Part ANecessity to consider ethics in the capital budgetingCapital budgeting is the process under which project is evaluated by the business firm.Under this method there are number of approaches that are used by the managers to evaluate theproject. Relevant methods are payback period, average rate of return, net present value andinternal rate of return method. There is specialty of all these project evaluation methods for thebusiness firms. It is very important to consider ethics in the use of capital budgeting method.This is because in this approach one need to make projection of the cash flows and same are usedto measure the viability of the project (Bierman Jr and Smidt, 2012). It must be noted that formaking projection cash flows are estimated by making assumption about the growth rates. Thereare number of stakeholders of the business firm and every firm main target is to create goodimage among the stakeholders. Stakeholders makes investment in any business firm byconsidering its cash flows that are estimated by the project managers. If there estimation will bewrong then in that case stakeholders will make wrong investment decision in respect to thebusiness firm. Thus, it is necessary to consider ethics in the capital budgeting process. This isbecause making of wrong projection lead to cheating with the shareholders. Thus, it is veryimportant follow ethics in the capital budgeting process because by making estimation of wronggrowth rate of cash flows situation is misunderstand by the investors and when they face lossfirm image tarnished among the them. This negatively affect the business firm.

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