Sample Case Study On Capital Budgeting
Capital Budgeting is found to be an effective part of finance management function, as it used specifically to analyze the level of feasibility of a project. Capital Budgeting has numerous options, which have the ability for the organizations to analyze the level of feasibility of a project. Some of the major types of capital budgeting tools that used by the organizations are
Net Present Value (NPV)
Internal Rate of Return (IRR)
Profitability Index (PI)
Accounting rate of return (ARR)
There is a case associated with this assignment of a company which is hypothetical names as Brody’s Sports LLC. The case divulged that Brody Sports LLC is a sports oriented company that sells sports based equipments and cloths to the general public. It is advice the most powerful capital budgeting techniques to the analysis and scenario of the company.
Is the Project Acceptable?
There are two different types of analytical techniques that can be used in this particular analysis to complete which are Present value of the cash flows and the rate of return. The Net Present is as follows
The entire analysis is manifesting that the computed NPV is $ 305, which is showing that project will be worthwhile for the corporation as it will bring positivity within the net income provisions particularly. According to the law of NPV, if the present value of this project is high the actual cost association of project, hence it will be projected accordingly. In this particular scenario, the project should not be selected because the NPV of the project is very low, and it might not get anything effective in the future in the future.
Secondly, there is yet another capital budgeting tool with the name of Discounted Rate of Return (DRR). The IRR is basically a rate on which the core value of future consequences will become zero. If the IRR is higher than the hurdle rate, hence it should be selected. The computed IRR of the project is 7%, which is lower than the actual rate of 8.5%, therefore the project should not be selected by the company as it will not come for effectiveness within the company, and the company has to use different things accordingly.
According to the scenario mentioned in the study of the case, it is evaluated that the CECF total of the company is $ 36,818,427. It is found that the CECF is positive and high, and according to this particular analysis, it is found that the project should be selected according. The CECF is not a perfect analytical ratio as compared to the NPV and IRR because it has nothing to deal with other things. After considering this particular analysis of CECF, it would be very effective and feasible for the company, and it will bring positivity and effectiveness towards the financial position of the company with a positive mindset.
We have used three different techniques in the analysis which are the (NPV), The DRR and CECF. From the NPV and IRR analysis it is clearer that the current project should not be selected by the company because it will not bring any positivity and effectiveness for the company. Apart from these two approaches there are other two significance orders. The two approaches are Returning of Pay Period and Rate of Return in terms of accounting. The company can use to assess the effectiveness of this particular project. After having a critical analysis, it is found that computed NPV of this particular lies in positive node. It is advised through this analysis that not to open the new retail store of the sports, and it should not be selected. Brody’s Sports LLC should not be take consider the project as it will accelerate the pace of its economic momentum.
Garman, E., & Forgue, R. (2009). Finance for the individual. Mason, Ohio: South-Western.
Garman, E., Eckert, S., & Forgue, R. (1985). Personal finance. Boston: Houghton Mifflin Co.
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