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Week 5: Capital Budgeting

The famous economist, John Maynard Keynes, commented, “In the long run, we are all dead.” In other words, it is neither prudent nor recommended to plan too much long-term, because it is beyond human control to a large extent. However, from the corporate finance point of view, you still often have to consider reasonably long-term implications of investment decisions. As a manager or an executive, you want to make sure that your organization not only makes a profit, but also is profitable in a sustainable manner.

Consider the scenarios below:

  1. Your company is not performing well during the operating year and you anticipate lowered profit and maybe even incurring losses at the end of the financial year. However, the top management wants to show higher profits. Therefore, the financial management team decides to sell some fixed assets in order to increase the revenue and thus increase the profit margin. Your management has met the goal of high profit for the current financial year. However, selling the fixed assets to achieve profit may prove detrimental in the coming years.
  2. Your company is planning to go through a major growth as well as a restructuring phase and needs a lot of money for that. As the chief financial officer (CFO), you have been asked to lead a team that will decide how to raise the money from the market. You have various options to raise the money. How do you decide which option to pursue?

This week, you start exploring capital budgeting. You examine various capital budgeting methods. You also conduct financial analysis of an organization and make recommendation that involves capital budgeting.

Learning Objectives

Students will:
  • Evaluate capital budgeting methods
  • Analyze the effect of depreciation on the net income and cash flows of a company
  • Analyze the strengths, weaknesses, opportunities, and threats facing an organization
  • Recommend financial strategies for an organization
  • Identify concepts of capital budgeting relevant to project feasibility

Photo Credit: [Nikada]/[E+]/Getty Images


Learning Resources

Required Readings

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2017).
Essentials of corporate finance (9th ed.). New York, NY: McGraw-Hill Irwin.

  • Chapter 8, “Net Present Value and Other Investment Criteria” (pp. 236-228)
  • Chapter 9, “Making Capital Investment Decisions” (pp. 274-301)

University of Kansas. (2013). Chapter 3, Section 14: SWOT analysis: Strengths, weaknesses, opportunities, and threats. Retrieved from
http://ctb.ku.edu/en/table-of-contents/assessment/…

Document: Week 5 Discussion Template (Word document)


Document: Final Paper Template (PDF)

Required Media

Laureate Education (Producer). (2014c).
Net present value tutorial. [Video file]. Baltimore, MD: Author.

Note: The approximate length of this media piece is 5 minutes.



Optional Resources

Ward. S. (2014a). How to do SWOT analysis for your business. Retrieved from
http://sbinfocanada.about.com/od/businessplanning/…

Ward, S. (2014b). SWOT example. Retrieved from
http://sbinfocanada.about.com/od/businessplanning/…


Discussion: Capital Budgeting

Understanding the most common capital budgeting techniques (i.e. NPV, IRR, Payback Period, etc.) is very important for investors and analysts alike. These methods provide a quantifiable value for various projects and investments.

For this Discussion, consider the various capital budgeting methods. Also, consider which capital method you think to be superior to others and why. Finally, consider the effects that depreciation has on net income and cash flow of a company.

By Day 3

Post a 150- to 200-word explanation of one of the capital budgeting methods (NPV, IRR, etc.) that are used to examine potential investments. Explain some of its advantages and disadvantages. Also, explain which capital budgeting method is superior and why. Finally, explain the effects that depreciation has on net income and cash flow of a company.

Be sure to support your work with specific citations from the Learning Resources and any additional sources.

Read a selection of your colleagues’ postings.

By Day 6

Response to two or more of your colleagues’ postings in one or more of the following ways:

  • Ask a probing question.
  • Share an insight from having read your colleague’s posting.
  • Offer and support an opinion.
  • Validate an idea with your own experience.
  • Make a suggestion.
  • Expand on your colleague’s posting.

Return to this Discussion in a few days to read the responses to your initial posting. Note what you learned and the insights you gained as a result of your colleagues’ comments.

Note: Refer to the Discussion Template in this week’s Learning Resources for your main post and response.

Submission and Grading Information

Grading Criteria

To access your rubric:

Week 5 Discussion Rubric

Post by Day 3 and Respond by Day 6

To participate in this Discussion:

Week 5 Discussion


Assignment:
Final Paper: Financial Analysis of an Organization and Recommendations

Thus far, in the learning activities of this course, you have addressed various concepts and principles of financial management. However, one important criterion for consummating knowledge in any domain is to be able to integrate the learning. This Final Project is an ideal exercise to demonstrate your ability to integrate the knowledge you have attained thus far in this course.

For the Final Paper, select a publicly traded company. Be sure that it is large enough so it contains a lot of easily found financial information. Using the financial information you find, you will develop a report that analyzes the company’s current finances and makes recommendations for the future.

By Day 7

Submit your completed Final Paper. Your Final Paper should be 2,000–2,500 words and follow the Final Paper Template found in this week’s Learning Resources. It should contain the following elements:

  • Executive Summary (250 words)
  • SWOT Analysis (250 words): Use sources such as Yahoo Finance, company annual reports, and other financial sources to develop your SWOT Analysis.
  • Recommendations and Justifications (1,250 words)
  • Concluding Thoughts (250 words): Your concluding thoughts on the future of your chosen company.

Note: See the Final Paper area of the course navigation menu for a detailed explanation of the all the requirements for the Final Paper.

Submission and Grading Information

To submit your completed Assignment for review and grading, do the following:

  • Please save your Assignment using the naming convention “WK5Assgn+last name+first initial.(extension)” as the name.
  • Click the Week 5 Assignment Rubric to review the Grading Criteria for the Assignment.
  • Click the Week 5 Assignment link. You will also be able to “View Rubric” for grading criteria from this area.
  • Next, from the Attach File area, click on the Browse My Computer button. Find the document you saved as “WK5Assgn+last name+first initial.(extension)” and click Open.
  • If applicable: From the Plagiarism Tools area, click the checkbox for I agree to submit my paper(s) to the Global Reference Database.
  • Click on the Submit button to complete your submission.
Grading Criteria

To access your rubric:

Week 5 Assignment Rubric

Check Your Assignment Draft for Authenticity

To check your Assignment draft for authenticity:

Submit your Week 5 Assignment draft and review the originality report.

Submit Your Assignment by Day 7

To submit your Assignment:

Week 5 Assignment

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