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Principles of Finance

Capital Budget Reply to each Peer about their post.

Capital Budget Discussion Reply 1 Paola :

Hi,!

You defined what capital budget investment is. This process is indeed one of the most impactful decisions leadership can make. There are multiple techniques or methods that were mentioned in our text on how to accomplish this task. Which technique do you think is the most efficient in determining the viability and profitability of a project?

Regards,

Paolo

Capital Budget Discussion Reply to Joanita:

Hello Classmates, and Professor Armas,

For this week’s course content, it discusses about Capital Budgeting. In the course content, Melicher & Norton (2017) defines Capital budgeting as the “process of analyzing, ranking, and deciding on large expenses or investments”; where the selected projects are being evaluated in reaching the highest returns possible. According to Kennedy (202010, “the analysis determines the estimated cash inflow that meets the actual investment returns”. The capital budget authorizes the corporation to select the equitable or accurate investment projects.

This week’s discussion prompt requires us to evaluate why the profitability of a corporation is largely based on how successful management is in making the sounded capital budget investment decisions. According to this week’s course content, “any project that exceeds 0.5 profitability index is not acceptable because the investors will only earn $0.50 back every one dollar invested so the PI(Profitable Index) must be over 1 to be worth more than the cost that will be invested”. Any investment made by a corporation; the management should ensure to use MIRR (Modified Internal Rate of Return) to make sure “cash flows are reinvested at the rate they were made”. If a corporation needs a quick return on an investment, payback period will be a great option because it shows the business “how long it takes to make the funds invested primarily into the project. However, payback period does not review the time of cash flow and time value but its still a good idea.

Melicher, (2017) states that the implementation stage of a project is very important because it “focuses on all the components needed to make a corporation’s project become successful”. In the follow-up stage, the project is revaluated for its progress in case changes in data this way the management team can decide to make decision on what to do if the project succeeds or fails. This ensures the management to make proper investment decisions because it will be essential to the corporation in making long-run profitability.

Briefly, capital budgeting reduces risks of a business, maximizes wealth of a corporation in attracting new investors, improves the position of the company in increasing future profits which will grow and improve the position of the corporation (Kennedy, 2020).

Reference:

Kennedy, P. (2020). Reasons Capital Budgeting Is Important? Retrieved from

http://thefinancialtipster.com/reasons-capital-budgeting-is-important/

Melicher, R., & Norton, A. (2017). Introduction to finance: Markets, investments, and financial management (16^th ed.). John Wiley & Sons, Inc.

Capital Budget Discussion Reply to Priscilla:

This week’s discussion will discuss why the profitability of a corporation is largely based on how successful management is in making the soundest capital budget investment decisions. According to Melicher and Norton (2017), capital budgeting is defined as “the process of identifying, evaluating, and implementing a firm’s investment opportunities” (p. 521). This involves long-term projects, which can produce more revenues and more profits over a certain period of time.

The profitability of a corporation is largely based on how successful management is in making the soundest capital budget investment decisions because the soundest decision can help to create a proper guide and direction over a project and add value to a business. Furthermore, it can help to create steady cash flow, which is necessary to produce more profits with specific return on investment. Capital budgeting is extremely important because it takes every possible consideration into account in order for the corporation to evaluate the profitability of every long-term project. If a corporation were to invest its resource into a project without understanding what the risks and returns are, it can be considered as irresponsible and can be a problem for them. Overall, capital budget investment decisions will be sound “only if it produces a stream of future cash inflows that earns the firm an acceptable rate of return on its invested capital” ( Melicher & Norton, 2017, p. 522).

References

Melicher, R. W., & Norton, E. A. (2017). Introduction to Finance: Markets, Investments, and Financial Management (16th ed.). John Wiley & Sons, Inc.