Capital Budgeting

Are there any similarities between a firm’s capital budgeting decisions and an individual’s investment decisions? Capital budgeting is the process of analyzing potential additions to fixed assets. Capital budgeting is very important to firm’s future because of the fixed asset investment decisions chart a company’s course for the future. The firm’s capital budgeting process is very much same as those of individual’s investment decisions. There are some steps involved. First, estimate the cash flows such as interest and maturity value or dividends in the case of bonds and stocks, operating cash flows in the case of capital projects. Second is to assess the riskiness of the cash flows. Next, determine the appropriate discount rate, based on the riskiness of the cash flows and the general level of interest rates. This is called project’s required rate of return or cost of capital in capital budgeting. Then, find the PV of expected cash flows and the asset’s rate of return. If the PV of the inflows is greater than PV of outflows (NPV is positive), or if the calculated rate of return (IRR) is higher than the project cost of capital, accept the project. Question b What is the difference between independent and mutually exclusive projects? Between normal and non-normal projects? Independent projects mean a company can select one or both of the projects as long as they meet minimum profitability. This is because the projects do not compete with the firm’s resources. Projects are independent if the cash flows of one are not affected by the acceptance of the other. Mutually exclusive projects mean if acceptance of one impacts adversely the cash flows of the other which is firm can select one or another project but not both. This is because projects investments that compete in some way for a company’s resources. When projects are mutually exclusive it means that they do the same job. Normal projects have outflows, or costs, in the first year (or years) followed by a series of inflows. Non-normal projects have one or more outflows after the inflow stream has begun. So, we can conclude that the lower the WACC, the higher the value of NPV. Question d 1) Define the term internal rate of return (IRR). What is each project’s IRR? Internal rate of return (IRR) is the discount rate that will equate the present value of the outflows with the present value of the inflows. The IRR is the intrinsic rate of return. By using financial calculator, the IRR for project L is 18. 13% while the IRR for project S is 23. 56%. 2) How is the IRR on a project related to the YTM on a bond? A project’s IRR is the discount rate that forces the PV of the inflows to equal the cost. This is equivalent to forcing the NPV to equal zero. The IRR is the estimate of the project’s rate of return, and it is comparable to the YTM on a bond. 3) What is the logic behind IRR method? According to IRR, which project should be accepted if they are independent? Mutually exclusive? The logic behind IRR method is; if the IRR is more than WACC, the project will be accepted, but the project would be rejected if the NPV is less than WACC. IRR that equal to WACC means it is technically indifference whether we accept or not the project, will not gain any benefit or loss. According to IRR, both projects can be accepted if they are independent because the IRR for both project have percentage more than the percentage of WACC. But, if they are mutually exclusive, only one project that should be accepted that is project S. This is because the IRR for project S is 23. 56% and it is higher compared to the IRR for project L which only 18. 13%. 4) Would the projects’ IRR change if the WACC changed? No, the IRR would not change if the WACC changed. Question e 1) What is the underlying cause of ranking conflicts between NPV and IRR? In the normal project for the NPV profiles to cross one project must have both a higher vertical axis intercept and a steeper slope than the other. A project’s vertical axis typically depends on the size of the project and the size and timing pattern of the cash flows. For example, for the large projects and with large distant cash flows would expect to have relatively high vertical axis intercepts. The slope of the NPV profile depends entirely on the timing pattern of the cash flows. The long-term projects have steeper NPV profiles compared with short-term projects. So, NPV can only cross in two situations which is when mutually exclusive projects differ in scale or size and when the projects’ cash flows differ in terms of the timing pattern of their cash flows (Project L and S). 2) What is the â€Å"reinvestment rate assumption†, and how does it affect the NPV versus IRR conflict? The underlying cause of ranking conflict is the reinvestment rate assumption. All DCF methods assume that cash flows can be reinvested at some rate. This applies to Project L and S. When we calculated their NPV, we discounted at WACC, 10% which means that we assuming that their cash flows could be reinvested at 10%. IRR assumes that cash flows are reinvested at the IRR. Discounting is the reverse of compounding. Compounding assumes reinvestment and also for the discounting. NPV and IRR are both found by discounting, so they both assume some discount rate. NPV calculation is the assumption that cash flows can be reinvested at the project’s cost of capital while the IRR calculation assumes reinvestment at the IRR rate. 3) Which method is the best? Why? The NPV tells us how much a project contributes to shareholder wealth. The larger the NPV, the more value the project adds, and added value means a higher stock price. Thus NPV is the best selection criteria. A project IRR is the discount rate that forces the PV of the inflows to equal the cost. This is equivalent to forcing the NPV to equal zero. However, NPV or IRR give better ranking is depends on which has the better reinvestment rate assumption. NPV is selected because it used as a substitutes for outside capital hence save the firm cost of outside capital. For most firms, assuming reinvestment at the WACC is more reasonable for the following reasons. If a firm has reasonably good access to the capital markets, it can raise all the capital it needs at the going rate, which in our example is 10%. Since the firm can obtain capital at 10%, if it have investment opportunities with positive NPV, it should take them on and it can finance them at a 10% cost. If a firm uses internally generated cash flows from past periods rather than external capital, this will save it the 10% cost of capital. Thus, 10% is the opportunity cost of the cash flows, and that is the effective return on reinvested funds. However, NPV and IRR usually give the same results to accept or reject the project for independent project. NPV and IRR occurs conflict only when mutually exclusive projects are involved. Question f 1) What is the difference between the regular and discounted payback methods? Payback period is defined as the number of years required to recover the funds invested in a project from its operating cash flows. Discounted payback is the length of time required for an investment’s cash flows, discounted at the investment’s cost of capital to cover its cost. Actually, discounted payback is similar to regular payback except that discounted rather than the raw cash flows are used. 2) What are the two main disadvantages of discounted payback? Is the payback method of any real usefulness in capital budgeting decisions? Discounted payback does consider the time value of money, but it still disregard cash flows beyond the payback period, which is a serious flaw. For example, if mutually exclusive projects vary in size, both payback method can conflict with the NPV, which might lead to a poor choice. However, many firms still use the payback to do the capital budgeting decisions. Payback and discounted payback used as a measure of project’s liquidity and risk. The shorter the payback, other things held constant, the greatest the project’s liquidity. This factor is important for smaller firms that do not have really access to the capital markets. Cash flows expected in the distant future are generally riskier than near-term cash flows, so the payback is used as one risk indicators.

PEST(LE) Analysis about ford Lab Report Example | Topics and Well Written Essays - 1500 words

PEST(LE) Analysis about ford - Lab Report Example Presently, the company operates worldwide in more than 80 countries and is listed on the New York Stock Exchange. The company owns a minor stake in companies Mazda and Aston Martin. Ford is regarded as the second largest automaker in the world based on the net sales of the year 2010. It is the eight ranked company American company in the list of Fortune 500, based on the global revenue earned in the year 2009 and 2010. This study will lay an emphasis on the background of the Ford Company and its worldwide operations. The study will also give an insight into the present scenario of the vehicle industry of UK and its impact on the Ford Company. The study will conduct a macro environmental analysis of the UK domestic and industrial vehicle industry. The study will highlight the present financial and strategic position of the company and the factors affecting the growth of the company. Finally, the study will conclude with a forecast of the company and suggestions that can improve its cu rrent financial and strategic position of the company. Background Presently, the company operates worldwide with an employee base of 166000 which helps in delivering vehicles that are of high quality and exceptional value to the customers across the globe (Ford, 2013h). The first car designed and manufactured by Henry Ford was Cadillac in the year 1901 and the company was known as Cadillac Motor Company. In the year 1908 the company introduced a car known as Model A, the first car with safety glass and a windshield. The company gained popularity and kept on manufacturing cars with innovative structure. By the end of 2005 the company was claimed as one of the world’s largest automaker in USA because of its introduction of a series of unique cars based on innovative technologies. The company had introduced cars based on hybrid electric powertrain technologies and plug in hybrid technologies which has increased its customer base of industrial and individual clients. The company had created a transportation revolution by manufacturing vehicles which were classy, sturdy and uniquely designed. Reasons & Methods of Growth of Ford The cars manufactured by Ford are known for their sturdiness, elegant design and high vehicle standards. The company is highly committed in the design and production of vehicles that have the ability to deliver superior performance, offer innovative safety and offer innovative safety and driver assist technologies (Ford, 2013c). This has earned the company several awards in its field like â€Å"Top Safety Pick Awards† from the Insurance Institute for Highway Safety (IIHS) and has also received good ratings from the same. The automotive supply chain of Ford is one of the biggest strength and the company relies on thousands of its suppliers for the timely supply of car raw materials, parts and other necessary services for successful automotive making (Ford, 2013j).The suppliers have acted as catalyst for the company in achieving lower costs, improvement of quality of car making and improving the sustainable development situation (Ford, 2013i). The management of Ford ensures that a pleasant relationship is maintained with the suppliers and there is enough support for the human rights in the supply chain (Ford, 2013b). The company believes in performing business activities by ensuring proper sustainable development practices like reduction of water usage by 8.5 percent, energy reduction and by customer engagement

Have the benefits that immigrants have brought to British society Essay - 1

Have the benefits that immigrants have brought to British society outweighed the problems they have caused - Essay Example According to mail online report, Britain plans to ban wives brought to the UK, mainly from India and Pakistan (Crackdown on 80,000 immigrants for abusing benefits system, 2009). This paper compares the benefits and problems of immigration in Britain Chart (2003) has argued that if someone is sufficiently motivated to travel thousands of miles in search of a better life, they are sufficiently motivated to get out of the damp bedsit and look for work in search of one that is better yet (Chart, 2003). People are immigrating to other countries on the lookout of better living conditions. In their home country, they may not have enough opportunities to utilize their expertise. For example, India is a country which is blessed with immense educated and skilled manpower resources. The problem with India is that because of the immense population size, it is unable to provide enough opportunities to the unemployed and thus failed to capitalise on the huge manpower resources they have. On the other hand UK is a country which is blessed with enough opportunities, but less manpower resources. Thus immigration helped UK to utilize the overseas manpower resources for their economic development. The immigrant community will work hard for better living conditions which will be beneficial to Britain. In fact, most of Indians are not working hard if they work in their home country whereas in immigrant countries like Middle East, America or UK, they have a good reputation as far as hardworking is concerned. â€Å"Immigration will add substantial numbers of economically productive individuals, and given the chance, many of them will be more economically productive than average† (Chart, 2003). Another biggest contribution of the immigrant community is the enrichment of British culture. A culture is a living thing, and it is always growing and changing. Cultures which feed on nothing but themselves tend to become