Capital Budgeting Decisions and Analysis

This assignment delves into the intricacies of capital budgeting decisions, exploring the theoretical frameworks and practical applications employed in assessing investment opportunities. It analyzes different capital budgeting techniques, such as Net Present Value (NPV) and Internal Rate of Return (IRR), and discusses their relevance in evaluating the profitability and financial viability of proposed projects. The assignment further examines the influence of factors like risk assessment, market conditions, and stakeholder perspectives on capital budgeting decisions.

Managing Financial
Resources and Decisions

1
By student name
Professor
Date: 26 August 2017.
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Contents
Task 1......................……………………............................................................................... 3
Task 2.....................……………………................................................................................ 8
References.................................................................................................................... 20
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Task 1
LO 1.1.
A company can have various sources of finances, given its nature and area of operation. In case of
the given company, XYZ PSC, the company is a large asset based company. The company is having very
good flow of finances from the following areas-
 Share capital – Bank loans.
 Retained Earnings- venture Capital.
The various sources of finance has been divided into following categories, given its nature and
source-
Internal Sources of finance, which the company gets from its own directors and internal
transactions – Interest of the owner, Profit in reserves, sale of fixed assets, debt collection etc.
External sources of finance, which the company gets from external parties and stakeholders-
Bank Loan, Government aid.
Short-term source of fiancé that are undertaken to satisfy the short-term needs of the company
- Trade credit, Factoring facilities, overdraft etc.
Long term sources of finance that are undertaken to satisfy the long term needs of the company
– Loan from banks, loans from family, hire purchase, leases etc.
LO 1.2
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The major sources of finance have their own share of advantages and disadvantages that has been
given hereunder, the company can makes use of the same for the best of their company-
 Share Capital
Advantages Disadvantages
 It is a major source of raising capital
for the business.
 There is fixed rate of interest that is
ensured on the same
 The company does not have to give its
property on loan to get hold of these
shares.
 The company has to pay a fixed rate
of dividend to the shareholders
before paying anything, from the
profits of the company, so it is a fixed
type of expenses for the company.
 There are also chances that over
capitalisation may take place, because
the share capital can be easily
redeemed so in that case it is a loss
for the given company (Minnis &
Sutherland 2017).
 Retained Earnings
Advantages Disadvantages
 It is one of the cheapest sources of
finance for the company.
 It helps in strengthen the overall
financial position of the company, as
it helps in increasing the profit.
 It also adds on to the overall capital
of the company, which in turn will
help in improving the overall market
 Retained earnings can be used for
variety of purposes. It is very
important that the companies must
be sure about how they want to
spend their money else it might lead
to over spending on part of the
company.
 Once the company retains some part
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value of the company and
strengthen the market position of
the company (Drew & Grant 2017).
of the profit, it is also deducting
some share of the shareholder. The
shareholders have the first right on
any profit of the company, so
because of this retention, it might
affect the overall image of the
company.
 Venture Capital
Advantages Disadvantages
 Venture capitalist is the new era
money lenders that provide huge
money to the projects they find
commercially viable. Thus they help
in growth of the start up business in
the country. Thus the company can
get good amount of finances with no
investment.
 Along with the finances to the
company, the venture capitalist also
provides a lot of technical assistance
and resources that will help the
company to develop in the long run.
 One of the major disadvantages is
that there is no stability, and the
company is dependent on the
venture capitalist and often has to
work as per their direction.
 Also the company won’t be able to
any short term benefits visibly from
the growth of the company. The
benefits can be realised only in the
long run of the business. These are
long term sources of finance with
very low stability (Filbeck, Zhao &
Knoll 2017).
LO 1.3
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 Investment in the big data analytics
The company can finance this investment by various methods. However since the company is in the
developing stage and the company cannot afford to spend a huge amount on the best option for the
company is to go for venture capitalist. The venture capitalist will provide the company with the
necessary amount of fund that it requires in order to make the invest in the big data analytics. However,
there are high chances that the company may not see the effect in the short turn, and the overall profit
will be visible only in the end. The company is still in development stage hence it won’t be economic alto
invest all the money itself , hence it would be better to take help of a venture capitalist in this matter,
that might help the company (Gupta & Pradhan 2017).
 Renting of office premises for a period of 3 years
The company can finance this investment by various methods. However since the company is in the
developing stage and the company cannot afford to spend a huge amount on buying these equipments,
the best option for the company is to go for “ leasing”. Leasing is an option in which the lessor and the
lesse sign an agreement, to use the asset, in return of certain lease rentals for a particular time. In
addition, since the company is developing, if in case there are new changes required in the overall
hardware and structure, the company can accordingly make changes and redesign the hardware, get
new equipments as the company may want. Since it is a part of the development period, it would be
safer to get the property on lease rather than buying the same. It will help the company to reduce the
overall charges on the profit of the company and then take then later it can buy the property
 Day to Day operations:
In case of financing of day to day transactions, the companies can often opt for short term sources
like the utilising the cash balances that are available, utilising the retained profit of the company etc, All
these sources provides short term finances that are enough to support the day to day operations of the
company. They are very easy to use and there are no external parties involved, so the companies can
use their cash freely as and when they want. These are the few ways, in which the company can finance
their demands with utmost profit and very low level of risk (Guragai et al. 2017).
L O 2.1
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The following are the total cost that is related to the given sources of finance and has been
stated hereunder-
Bank Loans – In case of bank loans, along with the principal, the companies often need to pay some
amount of inertest that causes a stress on their overall finances and often reduces their cash budgets.
Thus, companies should opt for those banks, in which the rate of interest is very low, and the company
does not have to pay a large amount of money in lieu of the debt taken by it.
Overdraft facility – In case of overdraft facility the companies needs to pay a large amount of overdraft
interest. In addition, it is compounding in nature cause in areas where the company might require
paying in hard currency, the overdraft will itself is deducted that is the nature of the overdraft facility
that the banks offer. It may seem to be very economical but in the end, it proves to be not (Venezia
2017).
Trade Credit – Trade credit will affect the overall credit worthiness of the company if it is not managed
properly. Given cases where the company has taken credit from some parties, and then the company
fails to provide them the services as it has promised. It will bring bad name to the company, and the
company’s credit worthiness might get hurt and in the future, no party will give credit to the company
(Smith 2017).
Retained Earnings – In case of retained earnings, they are viable when it is used for the development of
the company and just not to satisfy the current expenditure of the company. Using the retained
earnings in the optimum way is very important for the growth of the company, and then only the
retained earnings will be properly used.
Leasing – In case of leasing, there is an agreement that is signed between the lessor and the lesse,
where the lesse agrees to pay certain amount of lease rentals along with given amount of interest
during the lease period for using the asset of the lessor. Thus the total cost that the company will bear
in case it enters into leasing agreement, is the total amount of lease rentals along with some amount of
interest, and sometimes it is more economical to buy the asset rather than take the same on lease
(Schlege, Frank & Britzelmaie 2017).
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Task 2
LO 4.1
The main financial statements of the company consist of the profit and loss statement, the
balance sheet and the cash flow statement. The profit and loss statement provide deliration on what the
company does, what are the transactions that were taken by the company in given accounting period
that affects the overall profit of the company. The balance sheet reflects the overall position of the
company and the cash flow statement provides a disclosure on how the company ahs spend its cash and
what is the total amount of cash balance at the end of the accounting period.
The main purpose of the financial statements of any organisation is –
 To help the stakeholders that needs to take important decisions based on the financials of the
company, like the internal; external reporting entities, the investors, the financial specialists, the
banks and the overall population.
 The financial statements must be prepared as per the given accounting standards and the rules
and regulations of the government and should portray a true and fair view, about the financials
of the company.
 It is important that the company must provide the details about its financials to all the parties
that are connected to the company in a proper format, with all the necessary disclosures
(Muller, Ward & Moodley 2017).
The major differences between the financial statements and the cash flow statement can be
described as follow-
Financial statements Cash flow statements
A financial statement provides a true and fair
view of the company’s state of affairs. It is
often prepared at the end of the accounting
period, after taking into account all the
transactions that occurs and affects the overall
profit of the company. It is snapshot of the
The cash flow statement is prepared to show
the overall flow of cash in given period. The
cash flow statists consist of three type of
activity, operating activities, investing activities
and the financial activities. It shows how the
company ahs spend their cash balance in the
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economic position of the company for a given
time period. The financial statements consist
of the balance sheet and the income
statement. The stakeholders depend on the
financial statements to take important
decisions in regard to the company (Luu et al.
2017).
given time period, and what is theory overall
closing cash. The cash balance in the bank
account, must match with the closing amount
in the cash flow statement. It helps in
reconciliation of the books f account. It only
showcases one aspect of the company
financial, while the financial statement shows
the overall economic position of the company.
Reviewing the annual reports of the Emirates group of Companies.
Emirates is one of the very popular air line companies that provide the best services The
financial statement of the company is prepared as per the set standards of the company, following all
the important standards and procedures that the company was required to follow. The financial
statements consist of the income statement, the profit and loss statement, the cash flow statement. All
the statements are shown in a consolidated format, taking into account all the details of the parent and
the subsidiary company (Lo & Rogo 2017). The example of the same is presented below-
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LO 2.2
The financials planning is an important aspect of every business. It is necessary everything must
be planned before hand so that in situations of emergencies the company does not suffer much. It is
important to plan your expenses in such a manner that will ascertain maximum profit to the company.
There are various advantages of planning, budgeting and forecasting. It is important that the companies
properly plan beforehand, how they want to spend their finances and what are the methods they want
to employ. This method of financial plans has a large number of tools associated with it.
Planning helps in providing an overall layout stating what the organisation needs to do and
what methods can be employed for the same. In most cases, the companies forms annual plans, that
becomes a part of the strategic plan of the company that consist of planning for 3-5 years in advanced.
The management of the company forms these plans based on the mission and vision of the company.
The employees are expected to adhere to these plans of the company and take the necessary steps
there under, to achieve what the company desires too, by giving their best in that respect. Planning
mostly consists of two types of plans, long-term plans and strategic plans (Auken 2016).
Budgeting provides the base of the plan; it provides the detailed operational view to the plan.
Generally the companies prepare budgets keeping in mid short term goals and objectives. Updations of
these plans as per the current scenario are very important to ascertain its viability. It helps in asserting
what is the expectation of the business on basis of the plans drawn by the management. There are three
types of plans that the companies normally follows, margin budget, gross and operating budgets, capital
expenditure budgets, and operating expense budgets (Chariri 2017).
Forecasting helps in making future prediction, with respect to the company by taking into
account the data of the company. ForecCasting is generally done by experts and trained professionals. It
helps in analysing the actual performance of the company with respect to the set standards and in case
there is any deviation the reasons for the same is accounted for by the company. It primarily focuses on
what is happening by taking into account the data that is provided by the income statement of the
company. Forecasting can be done by three methods, top down approach, bottom up approach and
hybrid approach.
In case of the airline industry, these methods of planning and budgeting can be implied, to
properly plan the overall expenditure that the company needs to undertake. In case of airline industry
the company needs a large amount of capital and in that case planning becomes very important. And as
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there are so many competitors in the air line industry it is important to properly plans once expense ,
keeping in mind what the competitors are charging from the customer and then take major decisions. In
addition, forecasting helps in making assumption on how much the company will require spending, in
case of busy seasons or season where there are layoffs. The companies can also plan their major
investments in case of airplanes and other devices and fuel that it requires to conduct its operations
feasibly (Gupta & Tiwari 2016).
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LO 2.3
Making the best choices in relation to the funding perspectives of the company is very
important for long-term validation of the company, making a good choice is half the battle won. The
various key initiatives that are related to the business can be funded in various ways. The company can
opt for long term, short-term sources of finances given the nature of the overall operation that the
company wants to undertake. For small day-to-day operations, the company can sue the cash balances,
the overdraft facilities. In order to make big investments like buying equipments or taking the property,
the company can opt for hire purchase and leasing method, all these are the few methods by which the
company can finance its overall strategic requirements.
The information that is present in the financial statements is of great help to the members and
of the company. The different decision makers, who will be involved in the process of financing, can take
help from the past financial data, to take important decisions. The current market scenario and trend
analysis can also help the management in taking important decisions. The management can also take
expert advice that can help them in better development of strategies (Filbeck, Zhao & Knoll 2017).
The main group of decision makers that will be involve while taking important decision
regarding financing prospects of the company are the board of directors who are the main forming body
of the management, the financial advisors, and the stakeholders, which includes the internal and the
external advisors. The government also exerts a large amount of influence while taking major decisions
that might affect the overall financials of the company. These are the few ways in which the company
can finance their strategic operations and the board of directors are the main decision making body in
the company. They are the once who have the major power in relation to the overall operation of the
company (Abor 2017).
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LO 2.4
The company can finance the five A380 aircrafts by various ways. The company can opt for
taking the aircrafts on leases that will require the company to pay certain amount of lease rentals and
interest to the lessor, in the course of the leasing perio0d. Because of the lease transactions, the profit
of the company will be hampered and it will cost a deduction in the overall revenue. However, it is more
safe then buying the aircrafts which requires large amount of investments and often the companies if
doesn’t success, the cost becomes a huge bad debt. The company can also go for venture capitalist that
can fund their investments. However, in case of VC, it is probable that the companies had to function as
per the demand of the capialtsit as they are investing their money in the company. In these cases, often
the gains are visible in the long term; there is lack of short-term development and growth that can help
in motivating the company to perform well. The other type of way by which the company can finance
these aircrafts is by taking loans from the banks, but in that case, the companies must go for such banks
in which the rate of interest is low, so that the income of the company is not hampered because of the
same. The companies can also opt for hire purchase transactions, where a bank is involved as a
mediator, but that also includes payment of huge principle along with interest. However, the flow of
cash occurs in interval, hence does not affect the overall profitability of the company in a single go.
These are the few ways by which the company can finance its investment of aircrafts and the total effect
that it will have on the books of the company is explained. The company must make an evaluation of all
the possible options and then go for that option, in which the company gets the maximum amount of
benefit at the least amount of cost. That must be the aim of the company while taking important
financing decisions (Filbeck, Zhao & Knoll 2017).
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LO 4.2
In case of business, mainly there are three types of forms, sole trader, and partnership nod
limited company.
Sole Trader- In case of sole trader, there is single proprietor who handles all the accounts of the
company, takes all the major decisions that are related to the company, and enjoys the overall profit
alone. It is one of the simplest forms of business, there are very few rules and regulations to be
followed in this kind of business, and it consists of the three statements, the income statement, the
balance sheet and the Statement of Change in Equity and Report of money streams (Chariri 2017).
Examples of the same are given below under.
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Partnership- A partnership is an association between two or more person to carry on any
operation or business and share the overall profit and losses of the business in the agreed partnership
ratio as per the partnership deed. It is a very popular form of business. The partnership business mostly
consists of three types of financial statements - Financial statement, Profit & Loss Statement and
Capital’s Account (Maynard 2017). Examples of the same are given below here under-
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Limited Company – The company form of business is the most popular form of business. It may
be limited by guarantee or by the share capital or may have unlimited liability. A company has an
existence of its own, and all the companies follow the concept of going concern. The financial
statements of the company are prepared as per the accounting regulations, standards, and all the
companies are required to follow the same. The major financial statements consist of the income
statement, the balance sheet, and the equity and shareholders liability statement. An example of the
same is given here under-
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