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Issues in Capital Budgeting

asif-engineering.com/testserverIssues in Capital Budgeting As the Manager of Financial Affairs of North Star, it is my duty to inform the parent company’s Financial Management about the issues of capital budgeting regarding these four projects.

asif-engineering.com/testserverThey all have their own usefulness and are designed to benefit the company in some form or the other. And although the initial financing comes from the parent company but since ultimately every penny is repaid the rate of return is just as important to us as it is to the Management of Cargill. The project for the buying of the crane is the need of the hour in order to mechanize and would offer handsome results.

asif-engineering.com/testserverAlthough it is not that risky a venture but in case things go off the boil it can result in a loss of almost 15% on the overall investment, if the things go to one extreme. The second project is that of setting up a furnace, which means selling off the current value at its current price. It is a very capital-intensive project and needs a very heavy capital outlay but the best part about is that our tax liability stays where it is and this project after its useful life of 12 years would yield us positive return. Moreover even in cases when worst may come the loss would be minimal considering the amount of investment.

asif-engineering.com/testserverThird project seems slightly tricky because the percentage of costs saved is very good almost 20% but the catch is that we will be firing two employees, in fact four to make room for two more specialized employees. This can have a double-edged sort of impact and may disrupt the harmony amongst the employees.

asif-engineering.com/testserverHere again if worst may come the situation may be reversed completely and what is appearing to be a positive cash flow may turn out to be negative. The fourth proposed project seems worst of all and it is a mere idea to improve upon our own operations. It has negative cash flows and the reason is that it has a shorter life span and does not save that many costs over the 10 years of its useful life. So which project to choose and why? It boils down to project 1 and 2 that is between the crane and the furnace.

asif-engineering.com/testserverAs the attached excel file suggests it is all about the costs savings. They both help in saving costs by more than 15% but moreover the difference is there in the change in sign from positive to negative flows in case things get risky. They are both capital intensive ventures and one should rather choose a project which will help us in the long-run and build up for the company in

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