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Capital Budgeting Analysis - Research Paper Example

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Running Head: ABBREVIATED TITLE OF YOUR CHOICE (all caps) Capital Budgeting Analysis Superior Living Inc has been a big success of the past years. The company has been able to build a strong reputation amongst the clients resulting in a revenue generation of $250 million…
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Capital Budgeting Analysis

Download file to see previous pages... This shows that the company has improved on the efficiency of the usage of the assets of the company. This is also depicted by an improving asset turnover over the three year period. In 2003, the company generated $1.25 of revenue for every $1 invested in the assets of the company. Moreover, the company is also maintaining a strong control on its administrative and selling expenses; this is depicted by an improving net profit margin. This signifies that the company has strong growth prospects in future and could pave it way to become the market leader in its line of products. Figure 1 Figure 2 Figure 3 Since the company has strong future prospects, the company can use the IPO to its advantage. It will provide Superior Living Inc with the much needed capital money for expansion of its product lines including the production facility. The ‘going public’ stance will also boost the awareness of the company products in the market and develop a whole new batch of potential customers. This can eventually lead to an increase in the market share of the company. However, once Superior Living Inc goes public, she will have to face a number of challenges as well. The company will require fulfilling all the necessary obligations of the Securities and Exchange Commission as well as Sarbanes-Oxley Act which will lead to additional costs. Similarly, the management will come under immense scrutiny and pressure from different stakeholders which can lead to somewhat questionable practices for boosting earnings. This is because investors look at short term growth instead of the long term stability in the company. Debt is another option to the company to fulfill the capital requirements for the necessary expansion. the debt option will provide the company with the total control of the business with no scrutiny and pressures from the investors and other stakeholders. Similarly, the interest on the debt will provide a beneficial shield to the company as it will lower the future tax liabilities. However, the debt financing option will increase the leverage of the company; thereby increasing the chance of bankruptcy. Superior Living Inc has a moderate debt to total assets and debt to equity ratio. As shown in figure 4, the company finances only 28.3 percent of its total assets through the short term and long term debt. If the company funds the new production facility through debt, the ratio will still stay below 30 percent. Figure 5 depicts the debt to equity position of the company. The company has maintained an excellent interest coverage ratio over the three year period. It does not face any chance of interest payment crisis in near future; therefore, can easily use this option as well. Figure 4 Figure 5 The company has huge growth potential and a chance to explore new markets and product ranges. The new production facility is the need of the time; and therefore must be carried be carefully analyzed and carried forward. The new production facility’s cash flows were analyzed at different hurdle rates. Since the Net Present Value of the project is positive at all three possible hurdle rates, the project must be carried forward. Similarly, the Internal Rate of Return is greater as compared to each hurdle rate; therefore the project is acceptable. The project has a simple payback period of 3 years. However, the discounted payback period 4 years at a ...Download file to see next pagesRead More
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