Capital Budgeting Analysis Report

This report delves into capital budgeting, focusing on ethical considerations and various investment appraisal techniques. It evaluates the financial performance of Medigard and recommends strategies for effective capital structure. The analysis includes calculations of cost of capital, payback periods, net present value, and internal rate of return, concluding with the significance of ethical practices in project selection.

Accounting and
finance
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Table of Contents
INTRODUCTION...........................................................................................................................3
PART a.............................................................................................................................................3
Consider ethics in capital-budgeting............................................................................................3
PART b............................................................................................................................................3
1) Financial report........................................................................................................................3
2) After tax weighted and cost of capital calculation..................................................................3
3) Alternative capital structure to recommend lower cost of capital for company......................3
Enterprise value:-.............................................................................................................................4
PART C............................................................................................................................................5
a) Payback period.........................................................................................................................5
b) Discounted payback period.....................................................................................................6
c) Net present value.....................................................................................................................6
d) Profitability index....................................................................................................................7
e) Internal rate of return (IRR).....................................................................................................8
f) Decision for acceptance of project...........................................................................................8
g) Project acceptance in case of rate of return for 20%...............................................................8
CONCLUSION................................................................................................................................8
REFERENCE...................................................................................................................................9
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INTRODUCTION
Capital budgeting is an approach for planning further business operations related to long
term investment. The present report is based on understanding different investment appraisal
techniques and evaluation for calculating cost of capital as well suggestion for Medigard related
to effective capital structure is to be introduced. In addition to this, selecting best project for
Bluegum enterprise through investment appraisal techniques can be expressed through this
assignment.
PART A
Consider ethics in capital-budgeting
Capital-budgeting is a process to determine organization's long term investment for
creating innovations as well making decisions. Therefore, it is needed for manager of
organization to preparing planning by considering on ethics. There are some ethical
responsibilities of company to consider all factors for projecting such as estimating profit for
further year as optimum and according to entity's potential so appropriate project will be selected
as well effective return on investment can be gained efficiently (Bierman and Smidt, 2012).
Thus, ethical considerations are necessary to be followed on for choosing best project and further
implementing strategies efficiently.
PART B
1) Financial report
Preparing and maintaining records of company leads to prepare report that shows
financial performance o organization. It includes tools such as ratio analysis, income statement,
cash flow/fund flow and different kinds of reports for making decisions regarding future business
operations. As per analyzing financial position of Medigard, it is analyzed that company has
effective performance as balanced capital structure from last several years that indicates its good
presentation to sustain good reputation effectively (Lozano, Villa and Canca, 2011).
Alternative capital structure to recommend lower cost of capital for company
Cost of capital:-
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Interpretation
Cost of equity is 7% which means that for the risk that is taken on the investment one
must earn 7% return on the investment.
ENTERPRISE VALUE:-
Interpretation
Enterprise value is 56908 which means that by considering overall business capital and
liabilities net capital of the business firm is 56908 which is very high.
Average cost of capital:-
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Interpretation
Weighted average cost of capital is 7.08%. This means that on average basis overall cost
of capital is 7.08%.
PART C
a) Payback period
Through this investment appraisal technique, time estimated for return on investment
(Hall and Millard, 2010). However, project succession and time to be incurred in activity is
forecast that is considered as tool for selecting best appropriate project for Bluegum enterprise
effectiveness. Thus, this data estimation can be expressed as:-
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Interpretation:- As per data interpretation, it is analyzed that initial investment for
project is 54200 and cash flow for 4 years is 20608 while for the final year, it is 33808. Thus, it
can be expected that organization can accomplish project's task effectively in further 5 years that
shows project will be succeed effectively but return is not so liable for this projection.
b) Discounted payback period
Interpretation:- It is one most appropriate investment appraisal technique that is useful
for analyzing return on project investment through discounting method. However, different
results are estimated for projecting that starting 3 years will be spent for recovery and in next 2
months, return will be gained. Thus, it will be so fair for Bluegum enterprise.
c) Net present value
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Interpretation:- It is considered as most suitable tool for estimating return on investment
for projection. In this regard, present value factor is evaluated by [1/(1+rate of return)^number of
year]. By which, 5 years' PV are calculated as 0.87, 0.75, 0.65, 0.57 and 0.49 respectively.
However, present value is calculated by multiplying pv factor to cash inflow for each year.
Therefore, overall present value is 75644 that is deducted to initial investment that generates net
present value. Thus, NPV is measured as 21444 that is not so effective for Bluegum enterprise's
effectiveness.
d) Profitability index
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Interpretation:- Through this investment appraisal technique, profitability on each
investment is forecast in units. However, for each year, profitability is estimated as 1.39 that is
not so effective for projection. Thus, selecting this project will not be not appropriate for gain
high return.
e) Internal rate of return (IRR)
Interpretation:- Under this technique, return on investment is estimated in percentage.
However, for investing 54200, Bluegum enterprise will gain 29.59% that will be average for
organization. Thus, according to this method, it has been evaluated that return on investment will
be moderate.
f) Decision for acceptance of project
Project is viable because its NPV is high and IRR is moderate.
g) Project acceptance in case of rate of return for 20%
Project cannot be accepted at higher rate of return because same lead to reduction in
present value.
CONCLUSION
It is concluded that there is huge importance of capital budgeting method and ethics must
be followed because by following same it can be ensured that project is made in appropriate
manner. It can be said that by using mentioned method and ethics better decisions in respect to
project can be taken.
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REFERENCE
Books and Journals
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
Lozano, S., Villa, G. and Canca, D., 2011. Application of centralised DEA approach to capital
budgeting in Spanish ports. Computers & Industrial Engineering. 60(3). pp.455-465.
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