Non-Discounted Payback Period
The report discusses whether the Booli should expand its business operations or not. For this following techniques have been used in the analysis. In the research, the capital budgeting techniques have been discussed (Paseda, 2016). The aim of this report is to identify the various techniques of capital budgeting to know how to accept or reject the project. The criteria of choosing the proposal will be discussed in the report. Acceptance and rejection of the project depend on its profitability and cost of the project. If the profitability is high then the project is accepted by the company (Baker, Jabbouri & Dyaz, 2017). The Booli electronics Company have to decide whether to go for the new introduction in its project will be done by the company or not. The Company profitability, internal rate of return, the payback period is discussed in the report.
A non-discounted payback period is a method which ignores the time value of money in its calculation. This method assumes that there will be no earning after the project is over. That means that non discounted payback period ignored the cash received after a payback period of time (Chaysin, Daengdej & Tangjitprom, 2016). In Booli electronics, the discounted payback period comes out to be 2.9 years (Refer Appendix 1). This shows that the company can recover its cost in less time that is in nearly 3 years. The company money is invested can come back in reasonable time. So the company can accept this project and invest its funds.
Profitability index can be defined as an index which is highlighting the profits of the company. It is a useful tool for ranking the various projects at a time. It allows quantifying the profitability of all the available projects. Profitability index can be calculated by summation of initial investment and Net present value divided by the initial investment of the project. Higher the profitability index higher will be the profits. The company will choose those projects which will have high profitability index (Esty, 2014). The profitability index can be calculated by this formula:
Profitability Index = Present value of Future cash flows
Initial Investment
OR
= (NPV+ initial investment)/Initial investment
If the profitability index is greater than 1 then, the project will be accepted by the business and vice-versa. In Booli electronics, the profitability is coming out to be 1.97 times (Refer. 1.97 is more than one so the company will earn a profit in the new business expansion. The project SSHA should be opted by the company as the profitability index is more than 1.
Profitability Index
Internal Rate of Return is the method used to calculate the rate of return of the projects. The term internal here refers to that the factors affected this rate will be internal this rate will not be influenced by the external factors. IRR is accepted when it is greater than the Cost of a capital project (Daunfeldt & Hartwig, 2014). In Booli electronics the IRR comes out to be 30.50 (Refer Appendix 3). The minimum required of return earned by the company is 11%. The company is getting the higher return from the internal rate. Booli can choose the IRR as it is greater than the required rate of return by the company
Net present value can be defined as the difference between the total present value of cash inflows at discounted factor and initial investment. Net present value is the most important technique in capital budgeting. Since it is directly related to the objective of maximizing the wealth of the shareholders (Cavusgil, Knight, Riesenberger, Rammal & Rose, 2014). The Net present value can be calculated from the following formula:
Where,
Ct = net cash inflow during the period t
Co = total initial investment costs
r = discount rate, and
t = number of time periods
(Žižlavský, 2014)
A positive net present value indicates that the project earned by the business is more than the anticipated costs and vice versa. Generally, an investment with positive net present value will have the profits and negative net present value indicates the losses in the project. Net present value is chosen on the basis of positive value and higher amount (Leung, Springborn, Turner & Brockerhoff, 2014). Booli company net present value comes out to be $439, 28,233 (Refer Appendix 2). This shows that the company’s inflow is more than the outflow of the company. That means the company can earn profits from this expansion (Bierman & Smidt, 2014).
5 .Net present value is sensitive to changes in the prices. Net present value is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is one of the techniques to calculate the capital budget in a business. This business comprises of risks and opportunity while entering the market. With this risk, some market factors are influence the prices of the commodity. This method is used to calculate the profitability of the business. If the business is earning the high profits then the project will be accepted and vice versa (Walden & Kitts, 2014).
Internal Rate of Return
6 .The change in the net present value also occurs because of the changes in the quantity sold by the company. The overall sales of the Booli electronics company increase in the initial years after that it gradually keeps on decreasing. The net present value of the company changes as if the quantity sold is high then the revenues earned by the company is also high. Higher the quantity sold, higher will be the revenues earned by the company (Sayadi, Tavassoli, Monjezi & Rezaei, 2014).
7 .Yes, the Booli electronics should produce the SSHA as it will benefit the company. The sales of SSHA are showing the increasing trends in the initial year. From this company can be able to earn the high revenue from the business. This product has many new and unique features like Wifi tethering and access to a large number of music streaming services including Amazon, Spotify etc. The proposal should be accepted as the project cash inflows are found to be good. It will increase the earning and profitability of the company. From the Net present value, it can be seen that the $439, 28,233 is earned by the company from this product. The calculations of 5 years data depict that the profitability index of the company is also more than 1, so the introducing the new features in the product should be accepted (Nichol & Dowling, 2014).
8.Yes, the overall sales of Booli Electronics will decrease if the company tried another model. As SSHA offer new and unique things which makes the existence of other product difficult. The analysis will quite be complicated if other models are introduced. The overall sales of Booli Electronics Company have shown the increasing trend in the first year due to the introduction of SSHA afterward the sales has been decreased and fewer cash inflows received by the company (McCombie, & Thirlwall, 2016).
Conclusion
From the above discussion, it can be concluded that the capital budgeting techniques are important in business to evaluate the business proposals. The capital budgeting techniques are used in to evaluate the profitability and risk factor in the project. The project which has high profitability and low risk should be accepted by the company. In the analysis, the company Booli electronics has introduced new techniques in its new product because of which the sales of the company have been increased. An increased sale in the company leads to increase in the cash inflows. SSHA product increases the profitability of the company which is more than one in this company. The company payback period is also low that means the company can recover its investment in a short duration of time. The company cash flows are showing the increasing trend and the cash outflows of the company are less. This means that company has fewer expenses and cost, then also company can able to earn high inflow of cash. The company can recover its money from the market in short period of time. The company can grow substantially in the market. The company should opt for the SSHA product.
The Booli Electronics Company should expand its business in introducing the new features in the product SSHA. The company should for the expansion as it is a profitable situation for the company. The company can earn good amount of profit in it. The company payback is in favor of the company which will benefit the company. The company should concentrate on the period, profitability index and internal rate of return. The company should concentrate on the price and quantity of the product offered by the company. The company sales have been increasing in the initial years and start decreasing in the third year. There is an increase in the price of the product because of that there will be a decrease in the quantity sold by the company. The company should try to change its pricing policies so that the price can be reduced and other factors too. Booli electronics sales will also increase from this change in the company.
References
Baker, H.K., Jabbouri, I. & Dyaz, C. (2017). Corporate finance practices in Morocco. Managerial Finance, 43(8), 865-880.
Bierman Jr, H. & Smidt, S. (2014). Advanced capital budgeting: Refinements in the economic analysis of investment projects. Oxon: Routledge.
Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. & Rose, E.L. (2014). International business. Melbourne VIC: Pearson Australia.
Chaysin, P., Daengdej, J. & Tangjitprom, N., (2016). Survey on Available Methods to Evaluate IT Investment. Electronic Journal Information Systems Evaluation Volume, 19(1).
Daunfeldt, S.O. & Hartwig, F. (2014). What determines the use of capital budgeting methods?: Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4),101-112.
Esty, B. (2014). An overview of project finance and infrastructure finance-2014 update.
Leung, B., Springborn, M.R., Turner, J.A. & Brockerhoff, E.G. (2014). Pathway?level risk analysis: the net present value of an invasive species policy in the US. Frontiers in Ecology and the Environment, 12(5), 273-279.
McCombie, J. & Thirlwall, A.P (2016). Economic growth and the balance-of-payments constraint. New York: Springer.
Nichol, E. & Dowling, M. (2014). Profitability and investment factors for UK asset pricing models. Economics Letters, 125(3), 364-366.
Sayadi, A.R., Tavassoli, S.M.M., Monjezi, M. & Rezaei, M. (2014). Application of neural networks to predict net present value in mining projects. Arabian Journal of Geosciences, 7(3), 1067-1072.
Walden, J.B. & Kitts, N. (2014). Measuring fishery profitability: An index number approach. Marine Policy, 43, 321-326.
Žižlavský, O. (2014). Net present value approach: method for economic assessment of innovation projects. Procedia-Social and Behavioral Sciences, 156,506-512.
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