Discussion: Capital Budgeting and Financial Analysis
Review at least 2 academically reviewed articles on capital budgeting and 2 articles on financial analysis and complete the following:
A. Write an annotated bibliography of each article.
B. Based on the articles you reviewed, discuss what you learned
C. In addition, discuss how a manager would use the concepts in the articles you reviewed in managerial decisions.
Use APA throughout. Please organize your discussion as listed above.
MAIN POST -300 WORDS
3 REPLIES EACH – 200 WORDS EACH
REPLY – 1 (SHIVA CHARAN)
Capital budgeting is the process in which the organization invests the money on long term elements and it is also known as investment appraisal. These elements include the plant and machinery, land, project resources, and so on. These elements are the concepts that support human power on the assets that stay for a long time in the organization. The assets of capital budgeting are not sold. These assets will remain as long as the organization remains. The capital budgeting includes the firms of organizations, investment, and expenditure. The main purpose of capital budgeting is to increase the value of shares of the stockholders. Capital budgeting involves some methods that help to increase the profits for the business organization. These methods help to gain profits from the projects (Benallou & Aboulaich, 2017). The methods of capital budgeting help the flow of the amount from the projects which helps to reach the aim of the organization and fulfill the needs of the organization. Capital budgeting helps the organization to gain information about the value of certain elements and these elements include projects and investments. The capital budgeting gives a strategical plan of the inflow and outflow of resources that help the organization to set a benchmark (Malenko, 2019).
Financial analysis is the process that gives an exact value of the economic trends. These economic trends help to set up financial policies that help to develop a long-term plan in the business organization. The financial analysis helps in identifying the projects of the business organization. It helps in analyzing the financial position of the business organization. These analyzing methods include a balance sheet, invoice statement, and flow of cash statement. Financial analysis helps to identify the position of the company. It helps in identifying the company’s strategies and also helps in developing new strategies to achieve the aims of the organization (Ermasova & Mikesell, 2019). The financial analysis helps the organization to access the quality of different firms that are obtained from financial statements. The organization could easily identify the upcoming risks by using financial analysis. The financial analysis helps to increase the quality of the firms of the stockholders. The financial analysis report is provided with all the information that is gathered from the organization and also helps in calculating the ratio of the business organization. The financial analysis report provides an overall view of the organization. The financial analysis report conducts and provides a risk assessment within the organization (Wang & Wu, 2018).
References
Benallou, O., & Aboulaich, R. (2017). Improving Capital Budgeting Through Probabilistic Approaches. Review of Pacific Basin Financial Markets & Policies, 20(3), 1. https://doi.org/10.1142/S0219091517500187
Ermasova, N., & Mikesell, J. L. (2019). Public Capital Budgeting and Management: The Concept and Its Application in Three Important Federations. Public Finance & Management, 19(3), 175199
Malenko, A. (2019). Optimal Dynamic Capital Budgeting. Review of Economic Studies, 86(4), 17471778. https://doi.org/10.1093/restud/rdy043
Wang, W. and Wu, Y., 2018. Why Are We Lagging Behind? An Empirical Analysis of Municipal Capital Spending in the United States. Public Budgeting & Finance, 38(3), pp.76-91.
REPLY – 2 (CHENNA GADDAM)
Annotated Bibliography of this article
This Article of Edu Pristine is second article in series, in first article he discussed meaning and features of capital budgeting while in this article he is focusing on technique for capital budgeting decision and analysis. He first talks about Payback period and then Accounting rate of return method both are just initial method and particularly not widely used as it ignores time value of money & sometime ignores length of project. Thereafter he discussed widely used technique DCF (Discounted Cash Flow), NPV (Net Present Value), IRR (Internal Rate of Return) & PI (Profitability Index). This technique is paramount importance in actual business scenario (Andor, G., Mohanty, S.K. and Toth, T. (2012)).
Annotated Bibliography of 2nd article
Brien O’Connel have authored this article for the Street. The Street is a financial news and financial literacy website & hence this article talks in detail about definition in detail. He gives very simple definition of capital budgeting as Capital budgeting gives a business a useful financial measurement mechanism which may not be technical definition but it is explained in most simplistic manner Thereafter he discuss importance and requirement of capital budgeting. He has also described steps to carry out capital budgeting process. The first step is exploring business project / opportunity & then evaluate project cost & calculate return on investment (Arya, A., Fellingham, J.C. and Glover, J.C. (2018)).
B. Capital budgeting is very important technique for taking any major business decision. It provides opportunity to management to evaluate business proposal thoroughly and then make appropriate decisions. In case business make decision without appraising then there is high chances that company makes wrong investment decision and it may result into losing or reducing shareholders value. The capital budgeting financial measurement technique is especially DCF, NPV & IRR is very useful. Equally the steps in capital budgeting technique also provides overview of preparation required.
C. In addition, discuss how a manager would use the concepts in managerial decisions
The capital budgeting technique is very useful to evaluate any business proposal. It provides input to manager that how much cost is involved in particular business proposal and comparative benefits whether it is financial or otherwise. If business decision taken without appraising it may result in significant losses for the organization.
This technique is utmost important when significant investment decision are required to be made. Sometime there are more than one business proposal available before the management and appropriate capital budget technique will help to identify more beneficial project.
References
Andor, G., Mohanty, S.K. and Toth, T. (2012) Capital budgeting practices: a survey of central and eastern European firms, Financial Management Association European Conference,2730 June, Spain.
Arya, A., Fellingham, J.C. and Glover, J.C. (2018) Capital budgeting: some exceptions to the net present rule, Issues in Accounting Education, Vol. 13, No. 3, pp.499508.
REPLY – 3 (ARCHANA TALLA)
A. Annotated Bibliography
Batra, R., & Verma, S. (2017). Capital budgeting practices in Indian companies. IIMB Management Review, 29(1), 29-44.
The volatility of the global economy, academic development and the changing business practices has been considered to state that there is a need for re-examining of the capital budgeting by the Indian organizations. The study took consideration of 77 organizations listed in the stock exchange of the country and the determination was that the academic theories are being leveraged by the organizations that prominently are risk adjusted sensitivity analysis and discounted cash flow techniques of net present value and internal rate of return. The paper has also addressed that there is a theory practice gap remaining in the adoption of the specialized techniques. It was also identified that the organizations in consideration offers adequate attention to the non-financial criteria in selection of the projects.
Kengatharan, L. (2016). Capital budgeting theory and practice: a review and agenda for future research. Applied Economics and Finance, 3(2), 15-38.
The aim of the paper was to depict the capital budgeting theories and practices in context to enabling future research. An empirical study was conducted and it was identified that there is a need for incorporation of the risks in the capital budgeting. It was also identified that there is a difference in the capital budgeting practices in the developed and developing countries. The use of the sophisticated techniques for the capital budgeting was recommended as well as the use of the tools offering support was a considerable discussion. The study has also emphasized that there is need for research in capital budgeting theory and practices in a chaotic environment.
B. Lessons Learnt
The use of the specialized techniques for capital budgeting such as the real options, simulation and modified internal rate of return (MIRR) must be prioritized. Another key learning from the annotated bibliography was that the risk must be considered while capital budgeting and use of tools capable of offering support in the capital budgeting must be used to attain further benefits.
C. How would a manager use these learning?
The manager would use this learning to adopt capital budgeting practices that are state-of-art and suitable for the organizational need. The consideration of capital budgeting tools for automated process will also be taken in consideration that will mitigate effort, time and resources involved in the process. The manager will also consider risk while doing the capital budgeting and attain benefit from it.
References
Batra, R., & Verma, S. (2017). Capital budgeting practices in Indian companies. IIMB Management Review, 29(1), 29-44.
Kengatharan, L. (2016). Capital budgeting theory and practice: a review and agenda for future research. Applied Economics and Finance, 3(2), 15-38.
