M5A2: Applying Capital Budgeting Discussion

Capital Budgeting Peer Response

M5A2 Discussion

Peer 1

Applying Capital Budgeting

Elepise Ailima posted Apr 15, 2018 10:21 PM

Applying Capital Budgeting

Yes, it is realistic to assume that the economic concept where marginal revenue is equal to marginal cost and this can be applied to capital budget process. Capital budgeting process refers to long term invest and future profitability of such investment. Also, capital budgeting has many techniques that helps determine if the project will be profitable. There are various capital budgeting techniques that are often utilized which are; the Net Present Value (NPV), Internal Rate of Return (IRR) and Profitability Index (PI) are the most profitable. The Net Present Value is the most useful technique that calculates a projects present value of cash flows. Internal Rate of Return on the other hand is often used to calculate the rate of return of the project. While, the profitability index is used to calculate and determine the profitability of a project for the company. The significance use of all 3 technique helps in taking right decision regarding a project by a firm. The decision will come down to the managements preference.

Furthermore, the MC =MR has a rule that governs a firm’s price output decision to maxi missing profit or missing loss” (Mukherjee, n.d). The same rule is also applicable to capital investment with some appropriate modification. Capital investment expenditure will continue to be made till marginal revenue from last rupee equals the marginal cost of acquiring capital (Mukherjee, n.d) In order for a firm to maximize profit, they would need to set MR = MC. So therefore, it is important that company should take a project that the marginal cost is equal to the marginal revenue. According to my research,  “if MR>MC, the firm should make more units: it is earning a profit on each. If MR<MC, then the firm should produce less: it is making a loss on each additional product it sells” (Boundless Economics, n.d) Applying this rule can assure and five us the confidence that firm will achieve the point where marginal cost and marginal are equal.

Reference

Boundless Economic, n.d Competitive Markets MR=MC, retrieved from

       https://courses.lumenlearning.com/boundless-economics/chapter/production- decisions-in-

          perfect-competition/

Sampat Mukherjee, Malinath Mukerjee, n.d “Microeconomics” retrieved from

             https://books.google.com/books?id=LuXODAAAQBAJ&pg=PA315&lpg=PA315&dq =

Peer 2

m5 a2

mary chileshe posted Apr 16, 2018 12:19 AM

we can assume the economic concept where marginal revenue is equal to marginal cost and this can be applied to capital budget process. Capital budgeting process refers to long term invest and future profitability of such investment. Capital budgeting consider evaluating selecting and follow up capital expenditure alternative that would consider from investment point of view and it also consider how cost can be controlling to increase the profitability of investment.

Taking the marginal revenue and marginal cost to be consider in capital budgeting and for strategic planning proportion we will consider the various objective like increasing the wealth of shareholders, cost control, priority and proposed capital expenditure. All the mentioned objectives can be achieved when we carefully analyze the planning and implementation process to maximize the production possibilities with least cost, this would increase the productivity from MR, MC approach if we utilize. This would determine the output level with the given resources and invested fund.

MR, MC approach to be utilized in strategic planning and capital budgeting decision will evaluate the invested amount to be distributed to various planned activities that would generate required cash flow year to year and cost minimization point that would decrease the cost. Apart from, it will also consider risky and complex project that would require more amount of fund and their proper execution is required from profitability point of view taking the marginal cost and marginal revenue approach

Usually MR MC approach is very important criteria to analyze the production process in each section engaged in producing and selling product through which it can increase their wealth of shareholder.

 

 

References

 

Shapiro, A. C. (10/2004). Capital Budgeting and Investment Analysis, 1st Edition. [Argosy University]. Retrieved from https://digitalbookshelf.argosy.edu/#/books/0558302580/