Complex and expensive projects require very detailed budget to ensure success. Critically discuss. CIMA (2009) says better management accounting can help solve the common problem of mega project disasters. CIMA (2009) also states that many projects that appeared have been driven by mad geniuses and visionaries whose ability to go over budget has tested the sanity of all those involved. The best example is the Sydney Opera House (CIMA, 2009). It was one of the world’s most famous buildings which eventually went one thousand and four hundred percent over budget and sadly broke the career of architect (CIMA, 2009). Nine out of ten of all mega projects around the world go over budget, many by astronomical amounts (CIMA, 2009). The cost overrun has been constant over the seventy year period that we have been able to generate data which says about the profession of cost estimators (CIMA, 2009). Cost, time overrun, benefit, demand and revenue shortfall are the problems of budget does not hit the target for the mega projects (CIMA, 2009). Budgeting is defined as “the process of allocating an organization’s financial resources to its units, activities and investments” (Blumentritt 2006, p73). Although budgets are often stated in terms of money, they need not be, and can also relate to quantities made and sold, numbers of employees to be recruited, or weights of material to be consumed (ACCA, 2010). The purposes of budget are forecasting, planning, coordination, communication and authorization (ACCA, 2010). To draft a budget, an organization should do forecasting (ACCA, 2010). Forecasts are often based on the results of previous periods which are updated for known changes (ACCA, 2010). The forecast will not always be correct, but at least the organization had to look ahead (ACCA, 2010). Once forecast are completed, planning can be carried out (ACCA, 2010). Detailed planning might even require the forecasting stage to be revisited to check estimates or to try to gather...

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Capital Budgeting Analysis Project
MBA 612
The General Capital Budgeting Process and how it is implemented within Organizations
The general capital budgeting process is the tool by which an organization determines its choice of investments through analyzing and evaluating its cash in and out flows. The capital budget process is vital to the organizations mere existence. Capital budgeting decisions can mean the difference between the company’s survival and its extinction, especially in today’s volatile global economic environment. The goal of survival for an organization is to create the maximum amount of shareholder wealth. To achieve positive shareholder wealth, the organization must maximize its share price through creating a positive net present value. The organization cannot achieve shareholder wealth without the use and understanding of a solid capital budget process (Megginson, Smart, Graham, 2010).
Capital budgeting analysis is really a test to see if the benefits (cash inflows) are large enough to repay the company for three things the cost of the asset, the cost of financing the asset (interest) and a rate of return (Investopedia, n.d.).
The capital budget process involves three basic steps:
1) Identifying potential investments. This is the “idea” phase. Ideas can come from anywhere and in various...

...Capital Budgeting
Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.
1a) If the discount rate is 0%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 0% -$400,000
1 $100,000 0% $100,000
2 $120,000 0% $120,000
3 $850,000 0% $850,000
Answer: The projects net present value is $670,000
If the discount rate is 2%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 2% -$400,000
1 $100,000 2% $98,039
2 $120,000 2% $115,340
3 $850,000 2% $800,974
Answer: The projects net present value is $614,353.45
If the discount rate is 6%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 6% -$400,000
1 $100,000 6% $94,340
2 $120,000 6% $106,800
3 $850,000 6% $713,676
Answer: The projects net present value is $514,815.59
If the discount rate is 11%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 11% -$400,000
1 $100,000 11% $90,090
2 $120,000 11% $97,395
3 $850,000 11% $621,513
Answer: The projects net present value is $408,997.46
With a cost of Capital of 5%, what is this project's...

...WHAT IS CAPITAL BUDGETING?
1.
2.
Decision making process of selecting and evaluating longterm investments. Examples include the decision to replace
equipment, to develop new product, or to build new shop at
a new branch of operations.
It is very crucial for companies to make the right decisions
because these projects require a huge amount of cash
outflow committed for many years. A right decision will
increase the firm’s value as well as the shareholders’ wealth.
A wrong decision will result in a drop in firm value as well
as shareholders’ wealth.
Capital Budgeting
1
Capital Budgeting Process
1.
2.
3.
4.
5.
Generating long-term investment proposals consistent with a
firm’s long-term objectives
Estimating the relevant after-tax incremental cash flows for
these project proposals
Evaluating these cash flows
Selecting the project that will maximize shareholders’
wealth
Reevaluating these projects from time to time for control
purposes and carrying out post-audits for completed
projects.
Capital Budgeting
2
TYPES OF PROJECTS
1.
Independent projects – are projects whose cash flows are
not affected by the acceptance or nonacceptance of other
projects. If a firm has unlimited funds to invest, all the
independent projects that meet its minimum investment
criteria can be implemented. For example, a firm with
unlimited funds may be faced with 3 acceptable independent...

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Capital Budgeting
QRB/501
July 25, 2013
On this paper the reader will be able to find the rationale in the analysis of a specific capital budgeting case study. Definitions along with explanations related to capital budgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capital budgeting allows the companies to analyze one or more projects to decide eventually which project or piece of equipment would be most profitable or suitable (economically), according to the needs and the capacities the company has.
Before entering into the analysis a little further and into the company chosen let us define what Net Present Value really is. According to Business Dictionary (2011) the definition of NPV is “The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.” “NPV is considered as one of the two discounted cash flow techniques, the other one is the Internal Rate of Return”. There are different types of net present values such as the negative net present value (worse return), the positive present value (better return), and the zero net present value that basically means that the original amount is repaid at the rate established. We mentioned earlier...

...Business
AC543
Sean DAmico
August 20, 2012
Abstract
This paper will give a comparison between the various preferred capital budgeting evaluation techniques in the corporate business setting. There will be a recommendation given for the Guillermo Furniture Company based on the results of one or more evaluation techniques, which in turn will help direct the financial health of the organization.
Corporations are continually striving to improve the financial health of its organization and one strategic way many corporations are doing that is through capital budgeting. Capital budgeting involves choices. The choices revolve around projects that will add value to the organization. The projects can include acquiring land, purchasing a truck, or replacing old equipment. Many times, corporations are encouraged to undertake projects that will increase its profitability. The challenge is to find the appropriate evaluation method to bring the intended profitability into reality.
The three preferred evaluation methods that many corporations use are net present value, internal rate of return, and payback period. Many corporations often calculate capital budgeting solutions using all three methods. However, each method often produces contradictory results. The net present value method is the most accurate valuation approach to capital budgeting issues (smallbusiness). If a corporation can...

...CAPITAL BUDGETING
PRINCIPLES
Capital budgeting is the process of evaluating and implementing a firm’s investment opportunities, by virtue of properly identifying such investments that are likely to enhance a firm’s competitive advantage and increase shareholder wealth. A typical capital budgeting decision involves a large up-front investment followed by a series of smaller cash inflows. A typical capital budgeting process is focused around following basic principles:
1) Decisions are based on potential cash flows and not accounting income: If a project is undertaken and subsequently some relevant incremental cash flows are to flow out by virtue of such a capital budgeting plan, the relevant cash flows are to be considered as a part of the budgeting process, and the decisions on capital budgeting have to take such incremental cash flows into consideration, before properly evaluating such a capital budgeting plan. However, the sunk costs, which can’t be avoided, even by overlooking or avoiding such a capital budgeting plan, should not be considered for acceptance or rejection of the project.
However, while finalizing a capital budgeting decision, one needs to examine the impact of implementing such a plan on the cash flows of related activities undertaken by the same group, which has some synergy with the proposal for which the...

...The Basics of Capital Budgeting
Integrated Case Study
Allied Components Company
You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives, because Allied is planning to introduce entirely new models after 3 years.
Here are the projects’ net cash flows (in thousands of dollars):
0 1 2 3
| | | |
Project L -100 10 60 80
Project S -100 70 50 20
Depreciation, salvage values, net working capital requirements, and tax effects are all included in these cash flows.
The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm’s average project. Allied’s WACC is 10%. You must determine whether one or both of the projects should be accepted.
A. What is capital budgeting? Are there any similarities between a firm’s capital...

...Strident Marks can utilize the capital budgeting to evaluate their proposed long-term investments. Once we have identified a list of potential investment projects, the next step in the process will be to estimate the expected cash flows and risk of each project. Based on these estimates, we can evaluate each project and decide which set of projects are the best for Strident Marks to undertake. The primary decision methods used to evaluate the projects will be payback, net present value, and internal rate of return(Gallagher, 2003).
The simplest capital budgeting method is the payback method. The analyst must calculate the number of years it will take to recoup the project's initial investment (Gallagher, 2003). This is done by adding up the project's cash inflows one year at a time until the sum equals the amount of the project's initial investment. The number of years is the payback period. To evaluate this method, the manager must have in mind a particular number of years that is acceptable to the firm. If the payback period is less than or equal to that predetermined number, then the project is accepted.
Payback Method for Strident Marks Project
Period
0 Initial Investment -$10,000
1 Cash Flow $7,500
Remaining -$2,500
2 Cash Flow $7,500
Remaining $5,000
3 Cash Flow $7,500
Remaining $12,500
Solution:
Payback (in years) = 1 + (5,000/7,500)
Payback = 1.67 years
The decision rule for payback...