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Marta Ortiz
1. Offer some examples of expansion or
growth opportunities in which companies might use capital budgeting methods to
analyze. Cite real company examples.
I believe every company on earth uses capital
budgeting methods that they analyze for expansion and growth opportunities. I am going to go with the company
that I work for – the Board of Education. The Board of Education is a
company that uses its capital budgeting for expansion and growth. They have to expand when it comes
to their testing techniques to improve testing scores for the students. In order to do this they need the
resources for the growth opportunities. What I mean by this, they need to
hire the perfect teachers. They
need the teachers to be trained. They
need to have the correct materials for the testing. All of these are a must in order
for the expansion and growth opportunities to take place. And in order for this to take
place they need the proper capital budgeting methods. And this capital budgeting method
needs to be analyzed in order to be productive and successful for the benefit
of each student which it is affecting. In order for this to take place,
they need to consider the four basic steps in the capital budgeting process: the generation of proposals; the
estimation of cash flows; the evaluation and selection of alternatives and the
post-audit review.
2. How should a company prioritize all of its capital project opportunities?
2. How should a company prioritize all of its capital project opportunities?
Capital
planning and budgeting go hand in hand: “Capital planning is a way of
defining how you’re going to spend money to get the most impact how you’re
going to spend money to get the most impact for your organization and its
mission.” “Capital budgeting is knowing what you’re going to spend your money
on in the next year.” This
is the process of planning for purchases of assets whose returns are expected
to continue beyond one year.
Capital
investment is one of the most important decision processes a utility faces. The stakes are very high. Poor decisions – and especially
wrong decisions – will likely prove very costly. Therefore, the objective for a company
to prioritize all of its capital project opportunities is to develop a concise
but comprehensive set of integrated management strategies (including operations,
maintenance, and capital) for all assets within the company. These strategies form the heart
of an asset management plan. The
plan systematically: identifies the current state
(performance) of the assets; articulates the level of performance that the
assets need to sustain into the future; identified those assets that are
“critical” to sustained performance; integrates operations, maintenance, and
capital investment strategies to sustain performance at lowest total cost of
ownership; and describes a fiscal strategy to fund the integrated strategies.
Linn Hennoey
1. An example of a company that might use capital
budgeting to analyze expansion or growth opportunities is the aircraft
component manufacturer B/E Aerospace. They could analyze the potential
investment to replace one of their old machines with a brand new model.
2. A company should prioritize the capital projects
in the order of need or perceived value. They should start with projects that
pose issues such as health, safety or code-related issues. Then the company
should move on the items on the list that will have adverse consequences
if they’re deferred and, undertake the tasks that will help them reduce future
capital and operating costs. Lastly, they should think about the marketability
of their properties and the projects that will add perceived value to the
organization.
Wenjing Zhang
1. Apple recently announced its in car iPhone
integration system called CarPlay, and it is designed to be an eyes-free system
which allows users to safely use their iPhone for making call, texting and
entertainment. Since this is a new product which never exist in market before
and Apple is the first company who enter into this field, this is a huge risk
for Apple’s investment on this system. I think Apple might use Scenario
analysis as capital budgeting methods.
Firstly, Apple should consider the
R&D costs. Could the R&D costs be low due to its maturity and expertise
on system development? Or the costs might be high because this is new system
which requires more investments.
Secondly, Apple should consider if the
contractors who produce iPhone, iPad and Macbook can also produce this new
system. The production cost might be low if they can. However, the cost might
be high if Apple needs switch to another contractors.
Finally, Apple needs consider the
demand of this system because this is a totally new product in the market and
it is difficult to predict the future demand. If this works and customers are
satisfied with that, the demand might be strong. However, if many people think
this has a lot of potential distractions, the demand might be very low.
Apple may has optimistic, most likely
and pessimistic estimates on every variable based on its past experience and
prediction. Then Apple can estimate the probability of every situation and the
new present value to calculate the expected new present value of the project.
2. 2. As general, company should prioritize capital
project opportunities based on the internal return rate (IRR), and the highest
IRR project could be considered and implemented first. However, this is based
on that all variables and factors are equal among the projects. The higher
return projects always require higher risk and the company may fail to get
expected outcome and even less than lower risk projects. So, I think company
should prioritize capital project based on the net present value of the value.
For example, company should first use risk-adjusted discount rate method to
determine the risk rate of each project. This method can then assist company
determine the net present value of each project because it consider the risk
premium of the project compared to the market return and the financial
situation of the company such as beta (systematic risk).
Cheryl
Martin
Some examples of expansion or growth
opportunities in which companies might use capital budgeting methods to analyze
are the decisions to either replace old or obsolete equipment or completely
revamp the operation. If a plant is operating at a certain level and a part is
needed in the assembly line, for example, the company may just decide to
replace the worn out part or consider an entirely new, more efficient machine
all together. The company would have to look at the cost of replacing the
entire machine versus just the part instead. Perhaps an entire new machine
would produce more, take less energy to run, or require less resource time. The
company would have to decide whether to operate as business as usual with the
old part or see if investing in new equipment would save the company money in
the long run by being more efficient. A company may also consider a new product
line within their market to try and reach new customers. If they manufactured
sneakers only for adults, as an example, they may want to try and make sneakers
for children to reach that age group. A company may come up with a completely
new product to expand the reach of their market. The same sneaker company might
develop a great new winter boot that would expand their consumer base
especially in the winter.
Some real company
examples are Microsoft and Dove Soap. Microsoft, who is known for their
operating systems and Office Suite software, recently made their own tablet
called the Surface tablet. It is the first time they made a hardware product
instead of just putting their operating system on other computer manufacturers’
devices. Another example is Dove Soap. Years back they only made soap. Today,
they make body wash, shampoo, conditioner, and many other hair and skin
products.
A company should
prioritize all of its capital project opportunities by realizing the amount of
funds that are available for the capital projects. If a company has unlimited
funds, for example, there are really no restrictions on the amount of projects
they can invest in. If a company does not have an unlimited amount of funds,
they would have to put a constraint on the amount
put towards the capital projects. Another step in prioritizing is seeing if
there are enough managerial resources available to execute these
projects.
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