Business Memorandum On Initech’s Capital Budgeting Decisions

Proposal Analysis

Business Memorandum

RE: Analysis on whether to expand the business line by buying new plant or installing the new conveyer belt system.

I am very pleased to work with this esteemed company. I have done the analysis on both projects and come up with the strentghs and weaknesses of the two systems. I have however come up with the following recommendations and conclusions

1. Due to a negative NPV, the device expansion plan cannot be undertaken because it will decrease the value of the company should it be accepted and therefore lead to loss of shareholders wealth.
2. After calculations of the effective annuity annually( EAA), the conveyer belt system got the lowest negative value meaning that it’s the project that should be undertake (Baecker, 2007).

In capital assets budgeting, opportunity is an important factor when making considerations. It is also important for expansion of assets that mainly involve large expenses and therefore for a company to spend a lot of money on capital assets, it must have sufficient funds.

Net Present Value- it is a selection measure for measuring and analyzing the project. It affect the maximization value of any business directly and provides the amount of estimation of wealth that is contributed by the project. It shows any investor the value of wealth that is either added or lost after the undertaking of the project.

Payback Period- it is the period in which the operating cashflows of the project takes for the money to be recoverd fully for the project. In this project the operating payback period ends in 4.28 years which is equivalent to 5 years.

For system A,

System cost = $ 40000

= -35,000-13,000= $-110,282

Again,

For system B,

System Cost = $55,000

= -55,000-9,000= -$105,206.8

For system C,

System Cost = $120,000

= -130,000-1,400 = -$129,388.99

The Conveyer System

Recommendation and conclusion

For the conveyer system, system C is quit viable and equal to the task of replacing the old system. This is because it has the least amount of cost for both purchase and installation after 20 years while having the least cash outflow. This is due to the fact that the conveyer system has almost a positive NPV (Capital Budgeting Valuation, 2013).

Choosing a project with a negative NPV means that the shareholders wealth will be eaten into. In choosing between the conveyer system, I would recommend choosing of system AC as it has the longest period of installation at 20 years while having a cash inflow of $ 129,000.

However, the devise part project is the most efficient as it has profits all years for the five consecutive years and less capital item cost. It also has profits on taxes which act as incentives for the company. The management should consider going for the devise part project.

Device Part Project

Thank you,

Consulting Associate

JB Hi-Fi is an Australian home entertainment retail and wholesale company which supplies retail and wholesale entertainment systems and has many stores across Australia and the world. The average risk for JB Hi-Fi is the increased expansion in opening up new stores without any new brand in entertainment that has been established. Possible life of a project is 5 years depending on sales. The difference in cash flows can be initial investment, operating cashflows like fixed costs and variable costs. Other costs include sunk costs and opportunity costs and this affects the cash flow systems (Garcia and Goossens, 2010): Promotion of bonus sales also make the cashflow cvariance while discounted sales increases the cashflows due to increased sales. Last year during the thanks giving festivities, the company gave out a 10% discount on their goods increasing the sales revenue therefore increasing the cashflows. This leads to a positive NPV of the company which is good for the business. Market demands is sensitive to the NPV of the company and therefore changes in prices increases sales and therefore increases the tax rates of the company.(Leonard and Reiter, 2011)

1. b) The figure below shows the number of days in the inventory, the days payable, the days recievables of JB Hi-Fi company limited and its competitor Dick Smith limited

For JB Hi-Fi company in 2015, the days to inventory is 42.1 while in 2016 the inventory days increase to 43.1. on the other hand , Dick Smith limited in 2015 has inventory days of 36.8 days while in 2016 the inventory days are 37.8 days.

The days of recievables are 2.69 and 2.92 respectively for the two years reperesenting JB Hi-Fi limited while in Dick Smith limited, the days recievable are 15.30 and 15.33 respectively.

The days payable are 27.12 and 29.12 respectively for 2015 and 2016 respectively while in Dick Smith it is 98.2 and 94.2 respectively for the two consequtive years.

Commercial paper: This is the use made of the company’s accounts payable, accumulated short-term liabilities, such as taxes payable, accounts receivable and inventory financing as sources of resources.he company, when presenting itself to the official who lends the loans at the bank, must be able to negotiate, as well as to give the impression that he is competent.Non-liquid savings instruments are those whose term of maturity or exchange restricts the immediate availability of the money, which makes them convenient to maintain the safe saving The main types of commercial paper are:

They have no specific guarantee, but they are backed by all the patrimony of the society or company issuing, by its solvency economically and its prestige. The guarantee of an institution of credit is given as collateral, or a bond is issued from a bonding company or a bank.

Alternative source of resources. Secondly, the commercial papers will have to be accompanied by a line of credit and a credit letter if there is a difficulty in payment.

Investment policies in current assets and their impact on risk and cost effectiveness

1. A) Asset investment policies circulating
2. B) Impact on risk and profitability

In general, the impact on risk and profitability can be emphasized in commercial credit financing.

Policy of the company – assets above would result in an increase in total assetswithout increase in yields, thus return on investment. A decrease in these values can mean the inability to cover payments in time, stoppages in the production process for missing of inventory and decrease in sales by a credit policy not flexible.

Short-term financing policies and their influence on risk and cost effectiveness is important for consideration. It is important to take all necessary measures to determine a structure financial system, where all current liabilities effectively and efficiently finance the current assets and the determination of optimal financing for the generation of utility and social welfare (Commission meeting of New Jersey Commission on Capital Budgeting and Planning, 2011). A level of sales that grows evenly throughout the years will necessarily produce increases in current assets fluctuating current assets.

References

Baecker, P. (2007). Real options and intellectual property. Berlin: Springer.

Capital Budgeting Valuation. (2013). Hoboken, N.J.: Wiley.

Commission meeting of New Jersey Commission on Capital Budgeting and Planning. (2011). 1st ed. Trenton, NJ: New Jersey Office of Legislative Services, Public Information Office, Hearing Unit.

Garcia, J. and Goossens, S. (2010). The art of credit derivatives. Chichester, West Sussex, U.K.: Wiley.

Goel, S. (2015). Capital Budgeting. Business Expert Press.

Jus, M. (2013). Credit Insurance. San Diego, Calif.: Elsevier Science.

Kalyebara, B. and Islam, S. (n.d.). Corporate governance, capital markets, and capital budgeting.

Leonard, R. and Lamb, J. (2007). Credit repair. Berkeley, CA: Nolo.

Leonard, R. and Reiter, M. (2011). Solve your money troubles. Berkeley, Calif.: Nolo.

O’Brien, T. (n.d.). Applied international finance.

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