The Relationship between Cash Flow and Capital Budgeting - Free Essay Example

Sample details Pages: 6 Words: 1700 Downloads: 7 Date added: 2017/06/26 Category Finance Essay Type Compare and contrast essay Did you like this example? Capital budgeting is an important area in corporate finance. Since long term projects or investments require massive initial outflows, a firm has to determine whether they are worthwhile and not drain the firms resources. This is because it is often difficult to reverse a capital investment once it is in progress. There are many investment appraisal techniques that are commonly used by a company, each having its own strengths and weaknesses. The report discusses the capital budgeting decision made my one company, Alpha Electronics Ltd in deciding whether to launch a new Personal Digital Assistant (PDA). 2.0 ANNUAL CASH FLOWS The first step in capital budgeting is to estimate the annual cash flows during the lifetime of the project. The cash flows for each year of the PDA project for Alpha Electronics Ltd are as follows: Don’t waste time! Our writers will create an original "The Relationship between Cash Flow and Capital Budgeting" essay for you Create order Year 1 Year 2 Year 3 Year 4 Year 5 Sales revenue 17,500,000 20,000,000 25,000,000 21,250,000 18,750,000 Sale of equipment 3,000,000 Total inflow 17,500,000 20,000,000 25,000,000 21,250,000 21,750,000 Variable production cost 6,020,000 6,880,000 8,600,000 7,310,000 6,450,000 Fixed production cost 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 Depreciation 2,250,000 2,250,000 2,250,000 2,250,000 2,250,000 Total expenses 11,270,000 12,130,000 13,850,000 12,560,000 11,700,000 Profit before tax 6,230,000 7,870,000 11,150,000 8,690,000 10,050,000 Less: Tax 2,180,500 2,754,500 3,902,500 3,041,500 3,517,500 Profit after tax 4,049,500 5,115,500 7,247,500 5,648,500 6,532,500 Add: Depreciation 2,250,000 2,250,000 2,250,000 2,250,000 2,250,000 6,299,500 7,365,500 9,497,500 7,898,500 8,782,500 Less: Net working capital 3,500, 000 4,000,000 5,000,000 4,250,000 3,750,000 Net cash flow 2,799,500 3,365,500 4,497,500 3,648,500 5,032,500 Based on these figures, it appears that the project generates positive cash flows throughout the five years. However, cash flows in themselves do not tell the entire story. What is more important is determining whether the cash flows are in excess of the capital invested in the project to warrant its undertaking. 3.0 INVESTMENT APPRAISAL TECHNIQUES 3.1 Payback Period The payback period is the time it takes a company to recoup the amount invested in a project. This is the simplest investment appraisal technique both in terms of calculation and conceptually since it is easy to understand the concept of the length of time needed to pay off an investment (McLaney, 2001). For these reasons, it is highly popular. However, there are many drawbacks of this approach. The first is that it does not include the time value of money which makes it less accurate. Secondly, the long term profitability of a project is not the same as the payback time (Ross et al, 2005). For example, Project A may have a longer payback period than Project B, but it may also yield more profits in the long run. Focusing on the payback period will cause a company to choose an investment that has a shorter payback period over a project that brings greater long term benefits to the company. For this PDA project of Alpha Electronics Ltd, the payback period is 4.33 years. This is re latively long considering that the project has a life of 5 years and means that the company will only be able its cash outlay in the final year of the project. 3.2 Profitability Index The profitability index is calculated by dividing the total of the projects cash flows with the cost of investment. If a project has a profitability index that is greater than 1, it is accepted. If the profitability index is less than 1, the project is rejected (Bodie and Merton, 2002). The profitability index is relatively straightforward to calculate. Yet, the problem associated with it is when two mutually exclusive projects are considered. A project that has the highest profitability index may not be the most profitable. Similarly, if funds are limited, the profitability index loses its usefulness. The same occurs in terms of indivisibilities (Brealey et al, 2007). At a discount rate of 12%, the total present value of inflows is $13, 558, 005. The cost of the investment is $15, 950, 000. This means the project has a profitability index of 0.85. Using the general rule of thumb, the project should therefore be rejected since it has a profitability index that is less than 1. 3.3 Internal Rate of Return The internal rate of return (IRR) is the discount rate that will result in a net present value of zero. The value of an investment is determined by comparing its IRR with that of the companys hurdle, or normal discount rate. If the IRR of the project is higher than its hurdle rate, then the project is accepted. If the IRR is lower than its hurdle rate, then the project is rejected (Ross et al, 2005). The strength of the IRR is that it provides users with a discount rate that the project must achieve. Yet, the disadvantages of IRR are numerous. Firstly, it is difficult and time consuming to compute manually, though the problem does not arise when a financial calculator or financial software is used. Secondly, the IRR does not tell how much the project will earn the company in the long run, which is an important consideration in capital budgeting. Thirdly, there exists the problem of multiple IRRs or no IRR for particular projects, particularly those with irregular cash flows (Hau gen, 2001). The internal rate of return is calculated using the interpolation method. Two different discount rates are used to calculate different NPVs, one having a positive value and the other negative. Based on the calculations (Appendix 1), the IRR of the project is 6.24%. This is approximately half of the hurdle rate and is unacceptable. Therefore, the project must be rejected on the basis of its low IRR. 3.4 Net Present Value The net present value (NPV) of a project is the present value of all its future cash inflows less its initial outflow. This will enable the firm to decide how much it can earn from a project. A project is accepted if it generates a positive NPV while it is rejected if it generates a negative NPV (Watson and Head, 2001). The NPV is the best among all the investment appraisal methods. It is conceptually clear and meaningful to an organization. It does not have any of the serious weaknesses associated with other methods (McLaney, 2001). The NPV of this project is calculated as follows: Year Cash Flow Present Value Factor Present Value 0 -15,950,000 1.0000 -15,950,000 1 2,799,500 0.8929 2,499,554 2 3,365,500 0.7972 2,682,956 3 4,497,500 0.7118 3,201,232 4 3,648,500 0.6355 2,318,688 5 5,032,500 0.5674 2,855,576 Net Present Value -2,391,995 Since the NPV of the project is negative, it must be rejected. In this instance, the conclusion drawn by the IRR and NPV analyses are in agreement. Sometimes, a project may be rejected on the basis of NPV but accepted on the basis of IRR and vice versa. Here, it is unanimous that the project should be rejected as it is unprofitable to the firm. 4.0 SENSITIVITY ANALYSIS 4.1 Price Sensitivity The NPV of the project is highly sensitive to the selling price of the NPV. A slight change can alter the NPV from positive to negative. For instance, if the selling price of the PDA were raised from $250 to $269, the NPV of the project will be as follows: Year Cash Flow Present Value Factor Present Value 0 -15,950,000 1.0000 -15,950,000 1 3,398,000 0.8929 3,033,929 2 4,049,500 0.7972 3,228,237 3 5,352,500 0.7118 3,809,804 4 4,375,250 0.6355 2,780,550 5 5,673,750 0.5674 3,219,438 Net Present Value 121,958 This means that if the selling price per unit were raised by 7.6%, it would result in a positive NPV. However, increasing the selling price may not necessarily be beneficial if it results in a decline in sales volume. 4.2 Quantity Sensitivity As for selling price, the NPV of the project is highly sensitive to changes in quantity sold. For example, if the sales volume were increased by 15% each year, the total cash flows would be as follows: Year 1 Year 2 Year 3 Year 4 Year 5 Sales revenue 20,125,000 23,000,000 28,750,000 24,437,500 21,562,500 Sale of equipment 3,000,000 Total inflow 20,125,000 23,000,000 28,750,000 24,437,500 24,562,500 Varable production cost 6,923,000 7,912,000 9,890,000 8,406,500 7,417,500 Fixed production cost 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 Depreciation 2,250,000 2,250,000 2,250,000 2,250,000 2,250,000 Total expenses 12,173,000 13,162,000 15,140,000 13,656,500 12,667,500 Profit before tax 7,952,000 9,838,000 13,610,000 10,781,000 11,895,000 Less: Tax 2,783,200 3,443,300 4,763,500 3,773,350 4,163,250 Profit after tax 5,168,800 6,394,700 8,846,500 7,007,650 7,731,750 Add: Depreciation 2,250,000 2,250,000 2,250,000 2,250,000 2,250,000 7,418,800 8,644,700 11,096,500 9,257,650 9,981,750 Less: Net working capital 4,025 ,000 4,600,000 5,750,000 4,887,500 4,312,500 Net cash flow 3,393,800 4,044,700 5,346,500 4,370,150 5,669,250 This would translate into a positive NPV of: Year Cash Flow Present Value Factor Present Value 0 -15,950,000 1.0000 -15,950,000 1 3,393,800 0.8929 3,030,179 2 4,044,700 0.7972 3,224,410 3 5,346,500 0.7118 3,805,533 4 4,370,150 0.6355 2,777,309 5 5,669,250 0.5674 3,216,885 Â  Net Present Value 104,316 5.0 QUALITATIVE FACTORS IN INVESTMENT DECISION MAKING While quantitative factors are given due consideration in capital budgeting, qualitative factors should not be ignored. This is because a project that may not satisfy quantitative factors may have to be undertaken due to qualitative factors and vice versa. Let us now consider some of the main qualitative factors that are crucial to effective investment decision making. The first factor is the companys strategic objectives (Copeland and Weston, 1992). Often, an investment decision may not be profitable or yield a positive cash flow, but it is necessary to enable the firm to have a competitive advantage. For example, an electronics firm may decide to buy over a manufacturer of components to ensure a supply of raw materials, even if it means that the manufacturer is running at a loss. Another qualitative factor is company prestige and image (Haugen, 2001). Sometimes, an investment may be unprofitable, but it may raise the profile of the company and the related prestige is someth ing that may warrant the investment. For example, a company may decide to embark on corporate social responsibility activities that may represent an outflow, but it demonstrates a good corporate profile to the public so the company may regard the activity as necessary. The third factor is government regulations (Brealey et al, 2007). If the government mandates certain items to be included, then the company is forced to include them. For instance, a nuclear power plant is required to have a system and storage facility for nuclear waste. Even though such facilities constitute a negative investment, the power plant needs to include it if it wants to get the necessary government approval. The government may also require a firm to put in place employee safety measures that may be difficult to quantify, but are necessary for operations. 6.0 CONCLUSION Based on the various investment appraisal techniques, it can be concluded that producing the new PDA is an unprofitable project. This is because the project has a low profitability index, a long payback period, negative NPV and IRR. In addition, there are no 7.0 RECOMMENDATIONS Even though the investment appraisal techniques indicate that the company should not embark on this project, it is felt that the analysis is incomplete. This is because all the projected cash flows are for a given level of activity when it would be better to show them under different scenarios. After all, the actual outcome may be better, worse or the same as the expected outcome. Therefore, the company should do scenario analysis in which the NPVs and IRRs of the project are calculated under different scenarios. This will give the company a better indication on whether the project is worth undertaking. More detailed sensitivity analysis should also be done to determine the changes in variables that will influence the NPV and IRR the most. The company could even use Monte Carlo simulation to model uncertainty in a real-world environment.

The French Revolution During The Late 18th Century And...

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The Best War Ever America And Wwii Essay - 729 Words

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Limits of Participatory Technology Development †MyAssignmenthelp.com

Question: Discuss about the Limits of Participatory Technology Development. Answer: Introduction In the fast-paced competitive as well as dynamic world, the need for speed is very crucial. The businesses want to increase on their productivity with less resources, more cost savings and the improvement in the accuracy, in order to provide the ultimate experience (Ahson Ilyas, 2008). The customers increasingly expect on the demand serviced with an instant response as well as service. Many of such limitations to meeting on the immediate, round the clock customer expectations are all related to the people centric delivery of the service. As such, there has been a surge of interest to what we regard to as the robotics, which have been in existence in order to address on these challenges (Awazu, Baloh, Desouza, Wecht, Kim, Jha, 2009). It is important first to know what robotics is. Robotics generally refers to the design, the development and the use of the robots, which are the automated machines, which can accomplish a wide range of tasks in various scenario. The robots came first to be commercialized when they were initially integrated into the factory assembly lines to help in the streamlining as well as the improvement of the manufacturing productivity (Compagna Kohlbacher, 2015). The first application of the robotics was done in the car industry. Moreover, in the twenty first century the robots have increasingly been used to complete jobs, which could be regarded unsafe for the humans especially they have been integrated in the mining, military as well as the transportation industries. Based on the current research the number of the usage of these robots is expected to double by the time we reach 2020 (Compagna Kohlbacher, 2015). I believe this will impact on the business operation as well as the economies of the countries across the globe. As an ICT manager in a small Artificial Intelligence company which is based in Brisbane I have been tasked with the job of undertaking on this research about the robotic technology and the applications if it would be considered by the organization as a five year strategy plan. This will enable the company to expand and compete better with the current competitors we have in the market. The research objective for the research is aimed to find results on how to leverage the use of the robotics in order to improve on the business in the Artificial intelligence Company. There are various assumptions that are made in the research such as the following: it is assumed the executive management team would likely consider the aspect of the research (Fasoli, Krebs Hogan, 2004). It is also assumed that the other competitors do not have diversity of the use of the robotics in their business. It is assumed the artificial intelligent am working for has the upper hand in the use of the technology. I t is also assumed that this organization for the report is fictional organization which aim is to provide an insight on the research on the robotic technology. Investigation of the scenario case study The robotic technology looks into how a robot is programmed in order to perform task as well as interact with the environment, without aid from any human interactions. The robotics is essentially the science as well as the technology, which is behind the design, manufacturing and the application of the robots. The use of these technologies, which are used in the development of the machines, could be a substitute for the humans (Cascio Montealegre, 2016). The robots could be used in any situation as well as any purpose, but currently these are more used in the dangerous environment such as in the manufacturing, mining and the military industry such as detection of the bomb (Melfi, Menconi, Mariani Angeletti, 2002). The robots can take any form but some they have been made to resemble the appearance of the humans. This has been done so in order to help in the acceptance of the robot to certain replicative behavior, which are performed by individuals. The robot could replicate things like walking, lifting, speech, cognition and all the other aspect, which the human can undertake. Many robots, which are developed today, are inspired by the nature and the contribution from the field of the bio-inspired robotics. The robots presently are able to perform a number of various tasks as comparison to the past use of the robots. The advancement in the technology has helped the present robots to expand beyond the horizons (Fasoli, Krebs Hogan, 2004). The use of the robotics have been used for both the domestic and use and the mining, transport and the manufacturing industries. They have been a great asset since they can perform jobs, which are too dangerous for the humans (Cascio Montealegre, 2016). This has enabled the workers to be able to move to the more skilled jobs as the programming of the robots. The robots have found career in the medical field especially when they are used to assist in the precision of high surgeries such as the brain as well as the heart surgery. Based on the research it has shown that the use of the robot it is expected to surpass on the industrial robot market. Many manufactures have started to look in to these fields since there is lack of the workers. Types of robots used in various industries The robotics is a highly advanced technology, which is aimed at developing robots for various application. Various robots have been invented and being used in the various industry such as the following categories. Industrial robots: this type of robots are electronically controlled, and they are both programmable as well as reprogrammable in order to undertake various tasks with high precision as well as accuracy. These robots could be used in the advanced manufacturing facilities or perhaps a volume assembly line for a long period. They are usually very efficient and they can produce high yield or output. In the ICT, company that are working these kind of robots could be used for the businesses process in order to improve on the output. The robot are capable of carrying task that are difficult as well as hazardous for the human beings. The robot usually use perfected copy of the exact strategy for the purpose of troubleshooting purposes, issues as well as solutions could be solved and implemented much quicker. Domestic or the household robots: these types of robots are used at home. They may include different devices such as the robotic vacuum cleaners, sweepers, gutter cleaners and the pool cleaners. Based on the case scenario the organization is also using the domestic robotics only for a small part of the business. Military robots: The robots in this group are used in the military. These types include such as the bomb disposal robots, different transportation robots, reconnaissance drones (Breazeal, 2003). These robots are created for the purpose of the military, they can also be used in the law enforcement, used for the search, and rescue as well as other related fields. The artificial intelligence company am working at has been solution to many technological problems in many industries. The scope of our business is focused on providing robotics solutions especially in the mining, transportation and the manufacturing within Australia and Asia regions. These countries are developing and providing the solution to their industries would help our company to grow significantly. We intend to focus on the industrial robots since they can be implemented in these industries. With the diversification on the use of the industrial robots in the organization, we could be able to offer solution to these industries in these regions, which we intend to venture in the next five years. How robotic technology could be incorporated into the organisations operations in the future The robotic technology can change on the way the organization could manage on their operations (Breazeal, 2003). In the organization which is in the case study scenario it could incorporate on this technology in any operational activity where there is manual work which involving the use of the computers system. The robotic automation process has evolved from the various technologies, which have been used in the application testing as well as workflow automation. The company utilizing on the RPA tools it will work with any software platform or perhaps the system in the company and it would mimic on the interactions of the human since it has the user interface of the application, which are required for the process of the business (Breazeal, 2003). The robots usually use the methodologies that vary from the tool to the tool; they identify uniquely the sources of the data as well as the input and the output fields, which are part of the users workflow. The methodologies let the robots to replicate the human activity on the computer system, in case the exact steps could be defined as the script or perhaps a flowchart. The activity of a robot are customizable highly and they could be triggered as per the defined schedule or even an event driven. In the short term, the company could use the cognitive automation in the front office of the organization in order to replicate on the human interaction. An example of these are on the chatbots as well as the voice recognition based application. The simple robots in the front office activities could automate the simple transactions as well as optimize on the turnaround time for the more complex activities. On the long term the organization should aim at implementing RPA technology on all their back office processes in order to help the organization to place itself geographically to enable them improve on their efficiency and productivity when offering services. Example on the areas that can be improved are the data entry and the reporting processes which could be made efficient with the use of the robotic automation. There would be an optimization of the turnaround time for the processes, which have the structured as well as unstructured data as the inputs (Wang, Carley, Zeng Mao, W. (2007). When the businesses are improved, the organization will be ahead of the competitors therefore, they would be able to expand their business to the other regional because of the faster delivery of service and preference over the rivals. Advantages and disadvantages of using robotic The robotics are used in various industries such as manufacturing, military and the mining. They are increasingly being used in the factories and many individuals are losing their jobs as the robots are becoming more efficient as well as precise than the humans are (Dautenhahn, 2007). The following are the advantages of the robots. The robots could be used to go down far into the places that are unknown where the humans could be crushed. An example of this it can be used in the mining industry as well as in the diffusion of the bomb. Secondly, the robots have been found to perform the tasks at a faster rate than the human can do (Camarillo, Krummel Salisbury, 2004). Further, they can do more consistently as well as accurately. The robots have been found to endure on the hostile environment, such as the interplanetary atmospheres do not reflect their physical state as well as performance (Schatsky Schwartz, 2015). Lastly, the robots have been found to carrying out the repetitive as well as time consuming tasks very efficiently, they can do dangerous tasks, they can be adjusted on their parameters such as the time and the speed and they are unaffected by aspects which affect the humans. One of the disadvantage of the robots is that they are not intelligent or sentient (Lee, Olson Trimi, 2010). They can never improve on the results of the jobs, which is outside their predefined programming, since they do not think, they do not have emotions or even conscience, this therefore limits on the robots on how they can help or even interact with the people. Secondly, there is the risk of being hacked by an attacker who can take over the control of the robot to enable it to commit a crime (Melfi, Menconi, Mariani Angeletti, 2002). This can pose a great deal when it comes to the image of the organization (Lee, 2007). The cost of the robots is very high especially in the maintenance as well as the repair. The programs should be updated more often in order to suit on the changing requirement. In the event of the breakdown the cost of repair is also very high and the procedure for the restoration the lost code or perhaps the data could be time consuming (Bentas, Wolfram, Jones, Brutigam, Kramer Binder, 2003). The organization in the case study would likely inquire loss especially when it comes to the update as well as the repair and maintenance. Many individuals will also lose their jobs as the robots are much efficient and they can perform much faster than the human can undertake a given task (Camarillo, Krummel Salisbury, 2004). On one hand, it would be beneficial to the organization and on the opposite is a major lose to the employees who are working in the company. There have been potential hazardous risks, which have been associate with the use of the robots in the workplace. Some of the risks is such as security concerns especially when a hackers attack the program and controls the robot to do the work they want (Dautenhahn, 2007). This risk could be overcome if the robot has been installed well before it has been operational. When assembling the robot there should be proper installation of the robotic work cell and ensure all the control software and the hardware are well installed to prevent any loophole used by the hackers to control the system (Lee, 2007). There should be a proper installation of the robot which for the vital to success of the project and there should be safety procedures in place to make sure the system is installed correctly before there is full operations. When proper installation has been done some of the errors such as control errors, human errors and unauthorized access could be prevented. Ethical, social and legal considerations the organization could consider and solution to overcome The robots could be used to maximize on the productivity by reduction of the costs, but this may lead to some serious social issues such as unemployment especially when some staff will be laid off when the organization purchases the robot to work for them instead (Ahson Ilyas, 2008). Moreover, it could lead to deterioration of the relationship of the employees and attitude towards the work. When the robots have replaced the human workforce, there is a high possibility of increase of illegal criminal activities in the society due to unemployment in population. To overcome this issue the organization could validate on the significance of the robot workforce, which relate to the rise in productivity, efficiency and minimise on the wastages (Westerman, Bonnet McAfee, 2014). There is also ethical consideration of whether employees will get to work with the robots. The concern is working with them individuals do not emotional connect to the robots nor do they make impression in their lif e (Cascio Montealegre, 2016). Valuable qualities of the human such as sensitiveness as well as carefulness is unforeseeable from the robots. In overcoming this problem, the organization could educate the workers on the importance of the need of the technology. It is meant to help to be more productive as well as deliver on the services quicker. Once they get to embrace the importance of the robots they could work together to achieve a lot in the organization. The legal issue to consider is that of security how to keep the robot safe from the adversaries (Lee, 2007). The more the technology becomes powerful the more it could be used for the nefarious reasons and good. This applies to the robots, which are used to replace the humans. The robot could create damage if they are used maliciously. There is need to implement these system well in order to prevent hackers from taking control of the system. Conclusion The following recommendation could be implemented. One should be the development of the employee involvement or participation in the introduction of the robotic technology in the organization. There should be formation of a taskforce, which consist of the various department where the robots are being introduced. There should be technical support individuals who should be involved in the change of the process. There should be implementation of the occupational safety standards in order to ensure that there is safety of the workers and the robots. Some cases have arisen where the robots have been hacked and control taken over them to commit crime. These guidelines when implemented will address some of these issues. Lastly, safety measures should be developed and operationalized to protect the human workers as they work with the robots. References Ahson, S. A., Ilyas, M. (2008). RFID handbook: applications, technology, security, and privacy. CRC press. Awazu, Y., Baloh, P., Desouza, K. C., Wecht, C. H., Kim, J., Jha, S. (2009). Information communication technologies open up innovation. Research-Technology Management, 52(1), 51-58. Bentas, W., Wolfram, M., Jones, J., Brutigam, R., Kramer, W., Binder, J. (2003). Robotic technology and the translation of open radical prostatectomy to laparoscopy: the early Frankfurt experience with robotic radical prostatectomy and one year follow-up. 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