BUS650 Managerial Finance WK 3

Guidance

Distinguish the features of accounting statements; including, the Income Statement, Balance Sheet, and Statement of Cash Flows.

Summarize the features of Generally Accepted Accounting Principles (GAAP) that cause cash flow to differ from net income.

Compare capital budgeting analysis techniques; including Net Present Value (NPV), Internal Rate of Return (IRR) and Payback.

Synthesize recommendations for improvements to working capital practices.

Week 3 Discussion 1: Working Capital:

This is the difference between current assets and current liabilities. This is the monies than

is needed for day-to-day operations of the firm. Working capital is normally short term. The firm should evaluate working capital to help determine the best uses of their monies.

Week 3 Discussion 2: Capital rationing. Analyze the advantages of using internal rate of

return (IRR), net present value (NPV), and payback approaches to capital rationing. Clearly state your own opinion which of these approaches you prefer and use two source s from

Proquest to support that opinion. Review the attached video (Ch 12 06 Capital Rationing, 2012) for different scenarios when business leaders might want to ration capital:

Consider this scenario: You have had a company for ten years. Your equipment is not only

getting old but technology has advanced significantly to make that equipment obsolete. You are considering buying new equipment with state of the art technology. You review the

next several years of operations based upon what you have today and what you project if you purchase the new technology. Then you look at the cost of the new technology,

calculate the net cash flows per year over the depreciable life of that new technology, then

calculate net present value, internal rate of return, and pr ofitability index to see if it is optimal to purchase the new equipment.

Week 3 Journal: Capital budgeting. Review carefully the video posted in the classroom for

Week 3. After answering the questions, think about your own company and implement the

financial techniques from this week’s lessons to increase the financial health of your

company. Hint: see discussion 2 as capital rationing is very similar to capital budgeting. With capital rationing, you have a finite number of projects you can finance.