BUS 630 Week 5 Discussion Responses NEEDED

Discussion 1 Capital Investment Evaluation

Select one of the capital investment evaluation methods described in Chapter 10 of your text. Fully explain the capital evaluation method’s strengths and weaknesses. Take a position and defend the use of your selected method. Be sure to use at least two scholarly sources to support your position. Your initial post should be 200-250 words.

Guided Response: Review several of your classmates’ postings. Respond to at least two of your classmates who have chosen to defend a different capital investment evaluation method than your own. In your response, compare the strengths and weaknesses of their selected evaluation method against your own selected method.

Respond to Deserine Bakerham post

Capital investment is the acquisition of assets with an expected life greater than a year. Capital investment includes a cash outflow, which is the investment, and cash inflows, which are the returns on the investment (Schneider, 2017). Capital investment analysis to evaluate the profitability of the investment and determine whether it is worthy for companies. It is very important when a business is presented with multiple potential opportunities and needs to make an investment decision based on the long-run returns they can get. There are four capital evaluation methods: Net present value method (NPV), Internal rate of return method (IRR), payback period method, accounting rate of return method.

The payback period method is the last metric to calculate capital investment.  The payback period is the total time it takes for a business to recoup its investment. As Schneider stated the payback period method asks:” How fast do we get our initial cash investment back” (Schneider, 2017). The payback method is also viewed as a “bail-out” risk measure. One of the strengths of the payback is companies can use it as an initial screening tool when comparing two or more project options. The payback approach also helps identify which projects offer the quickest payback period (Balabanov, M.; Hermann, 2017). The weakness of the payback is that the long payback period may generate larger returns than a project with a short payback period. Another weakness of the payback it provides little to no information regarding the rates of return and it leaves out information regarding profitability during project payback periods (Balabanov, M.; Hermann, 2017).

 Balabanov, M.; Hermann, Y.; Khamitov, R.; Palau, Iliana A. (2017). Method for calculating the payback period of FACTS devices in the metallurgical industry. Dynamics of Systems, Mechanisms and Machines (Dynamics) Dynamics of Systems Retrieved from https://ieeexplore.ieee.org/document/8239431 (Links to an external site.)

Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.). Retrieved from Retrieved from https://content.ashford.edu/ (Links to an external site.)

Respond to Manu Chakumgal post

The methods for evaluating capital expenditures would be (1) payback, (2) return on investment, (3) internal rate of return, and (4) net present value.

Payback is based on the number of years it would take an organization to recover the cash spent on a project.

Return on Investment is based on the increase in accounting profit versus the rise in investments.

The internal rate of return is based on the “rate that will discount the future cash flows to be equal to the cash outlay for the project” (Fuertes-Olivera, 2017).

Net Present Value is based on “using an interest rate that represents the desired rate of return or at least sets a minimum acceptable rate of return” (Schneider, 2017).

In my opinion, I choose the position of defending the Net Present Value (NPV), also known as the discounted cash flow method. NPV is defined as the difference between the present value of cash inflows and the current value of cash outflows. NPV's most attractive strength is its ability to determine whether a specific project could increase the organization's profit. The NPV reflects the amount of income that one particular project will produce at a pre-determined rate of return. The form of the method can also pre-determine when a specific plan will earn income and the value of that income.

While the NPV has several advantages, it also holds several disadvantages, such as estimating both the current and future cost value of a project. Therefore, it could not be 100% accurate, and unforeseen costs could decrease the project's profitability. Also, the NPV does not determine a project’s actual return, but it can evaluate if it will return the required rate. Like anything in life, there are pros and cons to everything; however, the NPV method is more accurate and is able to compare multiple projects at one time.

 

References:

Fuertes-Olivera, P. A. (2012). Online Dictionaries: The Accounting Dictionaries1. International

Journal of Lexicography, 25(2), 191-215.

Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

Discussion 2 Ranking Investment Alternatives

(Problem 10-41) Grosvenor Industries has designated $1.2 million for capital investment expenditures during the upcoming year.  Its cost of capital is 14 percent.  Any unused funds will earn the cost of capital rate.  The following investment opportunities along with their required investment and estimated net present values have been identified:

Project	Net Investment	NPV	Project	Net Investment	NPV
A	$200,000	$22,000	F	$250,000.00	$30,000.00
B	$275,000	$21,000	G	$100,000.00	$7,000.00
C	$150,000	$6,000	H	$200,000.00	$18,000.00
D	$190,000	-$19,000	I	$210,000.00	$4,000.00
E	$500,000	$40,000	J	$250,000.00	$35,000.00

In your response, complete the following:

· Rank the projects using the profitability index. Considering the limit on funds available, which projects should be accepted?

· Using the NPV, which projects should be accepted, considering the limit on funds available?

· If the available investment funds are reduced to only $1,000,000:

· Does the list of accepted projects change from Part 2?

· What is the opportunity cost of the eliminated $200,000?

Guided Response: Review several of your classmates’ postings. Respond to at least two of your classmates by commenting on common responses in the ranking of the projects and by posing a question to challenge

Respond to Travis Gross post

Project	Net Investment	NPV	PI	Ranking
A	$200,000	$22,000	1.11	3
B	$275,000	$21,000	1.076	6
C	$150,000	$6,000	1.04	8
D	$190,000	$-19,000	0.9	10
E	$500,000	$40,000	1.08	5
F	$250,000	$30,000	1.12	2
G	$100,000	$7,000	1.07	7
H	$200,000	$18,000	1.09	4
I	$210,000	$4,000	1.019	9
J	$250,000	$35,000	1.14	1

 When trying to uncover the profitability index, you must divide the present value of a project’s net cash inflows by its net initial value. To do this you must add the net investment by the NPV. This allows you to get the net cash inflows. From there you divide the number by the initial investment (Schneider, 2017). The projects that should be accepted are J, F, A, H and B. With a designated $1.2 million for capital investment, the accepted projects total capital investment is $1,175,000 with the rest deemed as unused funds.

-Using the NPV, which projects should be accepted, considering the limit on funds available? E, J, F, A. These projects represent the order if NPV was used.

If the available investment funds are reduced to only $1,000,000:

Does the list of accepted projects change from Part 2?

With the maximum investment reducing to $1,000,000, project A must be removed. Projects E, F and J are accepted and totals $1,000,000.

What is the opportunity cost of the eliminated $200,000?

By eliminating project A you also remove the $22,000 as the opportunity cost.

Schneider, A. (2017).  Managerial Accounting: Decision making for the service and manufacturing sectors  (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

 

Respond to Brandon Duggan post

A	$200,000.00	$22,000.00	1.11	3
B	$275,000.00	$21,000.00	1.08	5
C	$150,000.00	$6,000.00	1.04	8
D	$190,000.00	-$19,000.00	0.90	10
E	$500,000.00	$40,000.00	1.08	6
F	$250,000.00	$30,000.00	1.12	2
G	$100,000.00	$7,000.00	1.07	7
H	$200,000.00	$18,000.00	1.09	4
I	$210,000.00	$4,000.00	1.02	9
J	$250,000.00	$35,000.00	1.14	1

When it comes to what projects that should be accepted, I would go with the top 5. These top 5 are J, F, A, H, and B. 

Project	Net Investment	NPV	PI	Ranking
J	$250,000.00	$35,000.00	1.14	1
F	$250,000.00	$30,000.00	1.12	2
A	$200,000.00	$22,000.00	1.11	3
H	$200,000.00	$18,000.00	1.09	4
B	$275,000.00	$21,000.00	1.08	5
	$1,175,000.00

If the funds were reduced to $1,000,000 the list would change of what projects to accept. As of now the projects are at $1,175,000 so that is $175,000 the new amount. I personally would drop Project H. This would take the overall money to $975,000. Dropping H over B I believe is the better option as B does not have much lower of a PI and keeps the invested amount at nearly the full $1,000,000. 

The opportunity cost lost would be $18,000. This is the NPV for Project H.