With the current U.S. economy in a weakened state, many companies are reluctant

Question

With the current U.S. economy in a weakened state, many companies are reluctant to implement any capital improvements or capital expenditures in fear of the economic uncertainty that exists that may negatively impact the cashflow of the organization. Assess the impact of this behavior on productivity, cost efficiency, diversification of assets, or impact to future cashflows that may emerge if companies continue this mindset indicating the long-term risk to profitability. Provide an example or scenario to support your response. Analyze the challenges that companies face in entering global markets. Identify the potential impact to capital budgets in making the decision to move into a global market.

Explanation / Answer

Capital budgeting is the process of determining whether or not an investment is worthwhile. Often companies will have several opportunities and must measure each one's potential in order to make a comparison and choose just one or a few. For example, a company might be trying to determine whether to buy new equipment to expand production capacity on an existing product, or to invest in research and development for a new product. The three main methods of taking this measurement are Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period.....................IRR Internal Rate of Return is a percentage very similar to an interest rate, and is used to compare a capital investment against other kinds of investment. Divide the expected profit by the expected expenditure, and you'll arrive at a percentage of returns. Then look at the company's other projects and determine the minimum acceptable percentage of return; this is called the hurdle rate. If the IRR is higher than the hurdle rate, the project is worth pursuing. The IRR is easy to understand, and is thus the most commonly used technique, though the NPV is more accurate...................................... NPV Net Present Value, or NPV, combines two concepts of value. First, it determines how much cash will flow in as a result of the investment, and compares that against the cash that will flow out in order to make the investment. Since these flows take place over time, and often the investment will pay off much later, we also take into account the present and future value of money. Because of inflation, money earned in the future is worth less in today's dollars than the same amount would be today. Therefore, NPV calculates all of those inflows and outflows over time, takes inflation and foreign exchange rates into account, and expresses the final benefit to the company in terms of today's dollars.......................................... Payback Period Very simply, the payback period tells you how long it will take to recover your investment in a project. If it will take one year to make back the investment from revenues from a new product, the payback period is 1. The payback period method is antiquated and falling into disuse, because it has some significant drawbacks. It doesn't take into account the time value of money, and it tends to favor very cyclical products that make the bulk of their money up front, rather than those that build momentum and can produce cash inflows over a long period.............................. Multiple Techniques Most companies use multiple techniques for all of their capital budgeting decisions. There are a number of minor methods, such as profitability index and sensitivity analysis, which can also be employed in making decisions. Since each method looks at the investment from a different perspective, it is best to employ multiple analyses and take the opportunities with the best return according to all techniques............................... ................... Even more than in start-up situations, evolutionary thinking is vital when entering and developing international markets. David Arnold examines modes of market entry, marketing entry strategies, and how international marketing strategy should evolve over time. The process of penetrating and then developing an international market is a difficult one, which many companies still identify as an Achilles

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