This essay explores the Capital Budgeting of Pevensey PLC. Capital budgeting is considered to be a specialist field. This report is going to discuss the results that were obtained using each of the methods of capital appraisals discussed in the paper…
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The present research has identified that Capital Budgeting is an important process for any organization. No organization can make good use of their money, unless they plan, decide and assess the best use of money. Good investment decisions maximize the earning potential of an organization and help boost the firm’s overall financial position and financial health. Good financial decisions are not intuitive. They require a lot of effort and financial planning. Many firms employ people with excellent financial knowledge and skills just to enhance the use of money. These people often lie at an important level of organizational hierarchy and given a title of CFO or Chief Financial Officers. Many firms, over the years, have realized the importance having people with good financial skills and have given these people more power and authority than the CEOs. As a result, these people are consulted every time a need arises for an organization to make a good financial decision. This good financial decision regarding the best machine is going to improve the asset earning potential for the firm and it is also going to improve the asset turnover and return on assets ratios. Pevensey PLC is a growing company. It needs to decide on the best option of a machine purchase. Currently, the company has four different options to ponder upon. It is good for the company to use financial tools of capital budgeting to appraise each of the four options before making the purchase. This will reduce the chances of a bad decision, and will put the company in a win-win direction. Hence, the company has done the right thing by consulting someone with the financial knowledge to look at the available options and deciding the best option for the purchase (Brigham & Ehrhardt 2010). This would ensure that the best purchase is made in the given budget. The best purchase will not only be the cheapest method, but the best purchase is also going to improve the overall financial position of the organization in the long-run. ASSESMENT METHODS: Capital budgeting is considered to be a specialist field. The methods used that are used to determine the best option to purchase are net cash flow method, discounted cash flow method, Payback period, NPV and IRR. No one method can alone be a good guide for the company for the best decisions. All of these methods have to be studied and used in congregation for giving the best answer to the company. This would ensure the best purchase is made in terms of returns, time value of money and cost of capital. The company can raise capital at a rate of 8 percent. This means that any of the option chosen must provide a return of at least 8 percent for the company to break-even. If this is not the case, the company will be losing money in real terms. It might be making money in nominal terms. Nominal and real returns are different. Nominal returns do not take into account the inflation rate and the cost of the capital to the company. Real returns take into account the cost of the capital that the company has to pay for obtaining the finance needed to make a purchase. The methods used in the report would help us calculate both the nominal returns and real returns to decide the best Machine to purchase that would maximize not only the firm’s cash flow, but will also the allow the firm to earn decent rates of return. The first method used to calculate the
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“Capital Budgeting of Pevensey PLC Essay Example | Topics and Well Written Essays - 1750 Words”, n.d. https://studentshare.org/management/1395799-capital-budgeting-of-pevensey-plc.
The study attempts to find the optimizing solutions by weighing respective costs and benefits of each machine. Analysis is explained in detail in the paper since the paper is addressed to the Board of Directors of the Pevensey PLC. The criterion for decision making is purely objective based on the projected cash flow generated by each machine and its respective salvage value.
Topic: Capital Budgeting Name: Course: Instructor’s Name: Date: In recent past, capital budgeting has gained popularity as of the main functions of management. Capital budgeting refers the selections of the projects that will yield higher the returns of the company.
Pevensey Plc is in the process of evaluating the financial feasibility of a capital expenditure which pertains to the purchasing decision of a machine. The procurement department of the company after careful deliberation and consideration have short listed four machines which are suitable and possess all the required functionalities.
Also, capital investment involves both stock investments and bond contracts. Bond contracts are loans to creditors that are usually paid in monthly or quarterly installments.
illiquidity How should responsible business managers use these concepts Is there a connection between them, and if so, what is this connection Each of the two pairs of concepts is complementary--each pair forms a whole.
In order to be effective both financial and non-financial measures must be able to motivate the managers and employees at various levels of the organization so that the organizational goals can be achieved. Performance evaluation and rewards are the major drivers for effectively motivating individuals in a firm.
The paper will discuss the issues in investment appraisal, cost of capital, and risk in relation to investment appraisal. The concepts of cash flows and discounting are very much related to the concept of time value of money, which assumes that a £100 today has more value or is preferable than £100 in the future.
Accounting rate of return is one of the simplest techniques for evaluating investments, though not widely applied. It works by determining the return which arises from profits generated from an investment. The main drawback of this method is that it does not take into account the time value for money.
The NPVs include Canadian NPV Project Prospective, and Canadian NPV Parent Prospective RPP. Relative Purchasing Power (RPP) NPV can be used for the long run due to its far-reaching relevance compared to NPV from the
Of the three techniques namely; NPV, IRR, and payback period, the most useful tool to use in project valuation is the NPV. Unlike IRR and Payback techniques, the NPV is a very accurate tool that helps to determine if the project will be
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