Draw up an outline or flowchart tracing the capital budgeting process from the i

Question

Draw up an outline or flowchart tracing the capital budgeting process from the initial idea for a new investment project to the completion of the project and the start of operations. Assume the idea for a new obfuscator machine comes from a plant manager in the Deconstruction Division of the Modern Language Corporation. Here are some questions your outline or flowchart should consider: Who will prepare the original proposal? What information will the proposal contain? Who will evaluate it? What approvals will be needed, and who will give them? What happens if the machine costs 40 percent more to purchase and install than originally forecasted? What will happen when the machine is finally up and running?

Explanation / Answer

Capital budgeting, or investment appraisal, is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure (debt, equity or retained earnings). It is the process of allocating resources for major capital, or investment, expenditures.

Following points are considered for installation of a new obfuscate machine comes from a plant manager in the Deconstruction Division of the Modern Language Corporation.

Managers will prepare original proposal and he should separate investment and financing decisions.A committee would be formed who will evaluate the upcoming of the machine installation.

Initial Investment Outlay:
It includes the cash required to acquire the new equipment or build the new plant less any net cash proceeds from the disposal of the replaced equipment. The initial outlay also includes any additional working capital related to the new equipment. Only changes that occur at the beginning of the project are included as part of the initial investment outlay. Any additional working capital needed or no longer needed in a future period is accounted for as a cash outflow or cash inflow during that period.

Net Cash benefits or savings from the operations:
This component is calculated as under:-
(The incremental change in operating revenues minus the incremental change in the operating cost = Incremental net revenue) minus (taxes) plus or minus (changes in the working capital and other adjustments).

Terminal Cash flow:
It includes the net cash generated from the sale of the assets, tax effects from the termination of the asset and the release of net working capital.

The Net Present Value technique:
Although there are several methods used in Capital Budgeting, the Net Present Value technique is more commonly used. Under this method a project with a positive NPV implies that it is worth investing in.

In case if the machine costs 40 percent more to purchase and install than originally forecasted the manager would then forecast the upcoming benefits and costs associated with the machine along with above mentioned points.For long term if the machine is beneficial it would be installed successfully otherwise the proposal will get rejected.

This proposal encourages to put-up machine to meet the consumers' needs. The significance of this initial plan would be helpful to the knowledge of the investor on installing machines. It would also be better for the investor to consider the specific needs of the target market. The purpose of this proposal is to push through the initial plan of putting machines . It provides small business with the advanced technical assistance and training. This will be accomplished through a cooperative partnership of the investor and the shareholders.

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