Integrating Life Cycle Costing And Life Cycle

Capital Budgeting Techniques for Decision-Making

Discuss about the Integrating Life Cycle Costing And Life Cycle.

The usage of the methods of present worth, annual worth and internal rate fo return are extensive in case  of the various capital budgeting decision making processes. The reason for their utility is as follows:

1. Present Worth-

FO rate purpose of determining the real value of the returns generated by the project the company makes sure that the cash flow received from the project is discounted for factors like fluctuations in the inflation rate, the risk that is borne and the corresponding return expected by the shareholders and variety of other factors. After the cash flows of the entity are discounted to factor in these elements, the present value of the cash flow is received by the management (Ciroth et al., 2015). This is a significant tool FO the purpose of decision making by the company.

1. Internal rate of return-

This is referred to the percentage of returns that is being created by the project for the stakeholders in its entire lifetime. The internal rate of return of the project must at all items be more than the cost of capital of the company. Cost of capital refers to the amount that the company will have to the lenders and the financial institutions that provided the company with the requisite funds for the project on the form of interest ND the repayment of the principle amount. It also considers the return that is expected by the shareholders of the company (Bierer et al., 2015). In many case it is found that the net present value of the project is positive, but the internal rate of return is lower Thant the cost of capital of the firm. In these situations, the company will fail to recover enough returns or cash flows for the purpose of repaying the lenders of the company.

Annual worth referred to the amount of cash flows or revenue that is going to be created by the project in the span of one year. This information is of tremendous importance for the management. the reason bee ng that using this information the management of the company can ascertain the period of time it will take to recover the costs that have been incurred in  respect fo the project (Goh & Sun, 2016).

In the case of conventional benefit, cost ratio the numerator of the equation contains the revenue that has been generated by the project and the denominator of the equation contains the total expenses that have been incurred by the company for the project. On the other hand, in case of the modified cost benefit ratio the numerator of the equation contains the revenue generated by the project after adjusting the maintenance costs and the operating costs of the project (Strazza et al., 2015). This deduction leaves only the net operating cost of the project and the denominator of the equation denominates the initial cost that have incurred by the company in respect of the project.

Present Worth Method

It must be noted that the recommendation received by both the methods in respect of the acceptability of the project, is always same. The reason for this is that, the in case of both the equations the numerator contains the revenue generated by the project and the denominator is represented by the costs incurred in respect of the project. If the revenue generated by the project is more than the cost incurred then the result given out by both the equations will be more than one. In case the costs incurred by the project are more than the revenue generated by the project, the result will be less than one (Auer et al., 2017).

Hence, in case of capital budgeting decisions this method can be used effectively. If the result I given out as more than one the project must be accepted, if the result is below one then the project must be dismissed.  

Conventional Benefit cost ratio value using Present worth method

Modified B/C Ratio value using Present worth benefit

The company that has been discussed in the present report is Lion. It is one of the biggest food companies that are based in Australia. The company is at present employing over 6700 employees all over Australia and New Zealand. The company deals with the production of juices, drinks and dairy products. The company is planning to extensively expand the bear and the alcohol segment of its product portfolio (Trigaux et al., 2017).

The present report sheds light on the ways in which the company can make use of the life cycle costing for the purpose of monitoring of the costs incurred by it and the corresponding revenue generated by these methods in respect of the company . A detailed discussion will be conducted in respect of the gaps that have been found in the process of implementation of the life cycle costing tool in the operations of the entity. The understanding of the gaps present in the implementation process of the tools used by the company must be understood for the purpose of facilitating the process of alleviating them. After developing an understanding the issues faced by the company some significant recommendations will be made in this respect to the management of the company (Bhochhibhoya et al., 2017).

It is unrealistic to assume that the implementation of a particular accounting or management tool will not have any gaps or deficiencies. There can he several gaps in the implementation of these procedures. The reason for these gaps can be wide ranging and May or Amy not is in the control of the management. The gaps present in the tools must not deter the management from making effective use of these tools for monitoring of the operations of the company and creating value for the shareholders in the end. Proper understanding developed in respect of the gaps present in the application of the tools in the operations of the company will ensure that the company is able to alleviate these in the recent future.

1. For the purpose fo referring to the nominal cash flows generated by the project the nominal rates must be utilised and for the purpose of making use of the actual rates, it must be ensured by the management of the company that the cash flows or the revenue generated by the company is adjusted with the variations in the price level index. In addition to this, the fluctuations in the inflation rates must also be considered (Zanchi et al., 2016).
2. The cost incurred by the company must also factor in the various systematic risks that are being incurred by the investors of the company. The reason for considering the impact of the systematic risk is that in return of the risk incurred by them they expect decent amount of return from the management of the company.
3. For the determination of the weights to be used by the company with respect to the capital budgeting decisions, the market value of the financial sources must be utilised by the company (Teshnizi et al., 2018).
4. The discounting rate that is being used by the Lion group I susceptibility to change due to the impact of several factors that may or may not be in the control of the management. Some of the factors that can affect the discounting rate to be used by the company include the inflation rate, the present capital structure of the company and the expected changes in the future cash flows accruing in respect of the company from the project.

Annual Worth

It is of paramount importance that the costs incurred by the company are continuously monitored by it along with the revenue that is being generated corresponding to the costs incurred. If the monitoring of the cost incurred and the corresponding cash flows will not be undertaken hay the management of the company then the use of various accounting and management toll will be useless FO Rate Company. Hence, all the internal control system that have been implemented or installed in the organisation is functioning properly. Hence, the recommendation made by the management is as follows:

1. The company must make sure that the cost incurred by it in respect of measuring the various carbon emissions and other environmental policy is able to generate intangible assets for the company like that of goodwill. This will help the shareholders gain some return rom it in the form of increase in the value FO the shares (Islam et al., 2015).
2. The various factors that affect the cash flow and the revenue generated by the company must be taken into account by the discounting rate used by the management for capital budgeting decisions. The factors to be used contain elements like increase in the inflation rate, the expected future cash flows and the systematic risks undertaken by the investors of the company.
3. For the purpose of determination of the weights to be used by the company, the market value of the financial resources must be used by the management (Farr et al., 2016).

Conclusion:

The consistence and the maintenance of the cash flows or there avenue generated hay the company is significantly affected by the various decisions taken up by the management ND their corresponding cost implications. The returns that are expected by the shareholders FO the company are also to be factored in the by the management of the company. In addition, an understanding has to be developed regarding the importance of the fixed assets in the operations of the business entity. This is because it is by the use of these fixed assets by the company it is able to generate revenue for the shareholders in the end. Hence, the decisions regarding the acquisition and other related decisions are of paramount importance to the stakeholders of the company. Hence, it must be ensured that the right kind of tools is being used by the management for the purpose of decision-making.

Reference

Auer, J., Bey, N., & Schäfer, J. M. (2017). Combined Life Cycle Assessment and Life Cycle Costing in the Eco-Care-Matrix: A case study on the performance of a modernized manufacturing system for glass containers. Journal of cleaner production, 141, 99-109.

Bhochhibhoya, S., Pizzol, M., Achten, W. M., Maskey, R. K., Zanetti, M., & Cavalli, R. (2017). Comparative life cycle assessment and life cycle costing of lodging in the Himalaya. The International Journal of Life Cycle Assessment, 22(11), 1851-1863.

Bierer, A., Götze, U., Meynerts, L., & Sygulla, R. (2015). Integrating life cycle costing and life cycle assessment using extended material flow cost accounting. Journal of Cleaner Production, 108, 1289-1301.

Ciroth, A., Hildenbrand, J., & Steen, B. (2015). Life cycle costing. Sustainability Assessment of Renewables-Based Products: Methods and Case Studies,, 215-228.

Farr, J. V., Faber, I. J., Ganguly, A., Martin, W. A., & Larson, S. L. (2016). Simulation-based costing for early phase life cycle cost analysis: Example application to an environmental remediation project. The Engineering Economist, 61(3), 207-222.

Goh, B. H., & Sun, Y. (2016). The development of life-cycle costing for buildings. Building Research & Information, 44(3), 319-333.

Islam, H., Jollands, M., & Setunge, S. (2015). Life cycle assessment and life cycle cost implication of residential buildings—A review. Renewable and Sustainable Energy Reviews, 42, 129-140.

Soni, V., Singh, S. P., & Banwet, D. K. (2016). Sustainable coal consumption and energy production in India using life cycle costing and real options analysis. Sustainable Production and Consumption, 6, 26-37.

Strazza, C., Del Borghi, A., Costamagna, P., Gallo, M., Brignole, E., & Girdinio, P. (2015). Life Cycle Assessment and Life Cycle Costing of a SOFC system for distributed power generation. Energy conversion and management, 100, 64-77.

Teshnizi, Z., Pilon, A., Storey, S., Lopez, D., & Froese, T. M. (2018). Lessons Learned from Life Cycle Assessment and Life Cycle Costing of Two Residential Towers at the University of British Columbia. Procedia CIRP, 69, 172-177.

Trigaux, D., Wijnants, L., De Troyer, F., & Allacker, K. (2017). Life cycle assessment and life cycle costing of road infrastructure in residential neighbourhoods. The International Journal of Life Cycle Assessment, 22(6), 938-951.

Zanchi, L., Delogu, M., Ierides, M., & Vasiliadis, H. (2016). Life cycle assessment and life cycle costing as supporting tools for EVs lightweight design. In Sustainable Design and Manufacturing 2016 (pp. 335-348). Springer, Cham.

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