Capital budgeting assignment help

CAPITAL BUDGETING1.a Informationneeded to analyze the feasibility of acquiring a supplier purchase.Fully understand the spend category of the supplierThe staff needs to ensure it understands everything aboutthe supplier that is their spend category. If for example the category iscorrugated packaging at a consumer products company, the staff will need tounderstand the definition of the category, their usage patterns and why theparticular types and grades were specified.The staffs need to identify all the stakeholders at all theoperating units and physical locations. For example logistics, which may needto know about shipping specifications, or marketing, which may need tounderstand certain quality or the environmental characteristics.The total historic expenditure and volumes; expenditurecategorized by commodity; expenditure by division, department; expenditure bythe supplier; future demand budgets should be analyzed by the staffs so as tohave a good view and clarification of the supplier.The supplier market assessmentConcurrently the staffs should run the supplier marketassessment for seeking alternative suppliers to existing incumbents.Understand the key supplier marketplace dynamics and currenttrends. The staffs should prepare should cost informationfrom the major components of the key product. To have a view on the keysuppliers sub tier marketplace, and analyze for any risks as well asopportunities. Should-cost analysis provides a valuable tool that can drivecost reductions and supplier continuous improvement efforts.To prepare a supplier survey.The staff prepares this for both incumbent and potentialalternative suppliers so as to evaluate the supplier capabilities, to accessthe capability and capacity of the market to meet their requirements. Hencethis enables assessment at an early stage whether the proposed project isfeasible, provides an early warning of requirements to the market and enablesthe supplier on how to respond. Thus the right suppliers are encouraged withthe right structure to respond to EEC.Building of strategy The staff to evaluate on how competitive the suppliermarketplace is. Staffs with the supplier information can build a competitivelandscape in the supply marketplace hence helping demonstrate thesize of prize to alternative suppliers and communicate the seriousness ofthe potential sourcing exercise to incumbent suppliers.On how supportive theorganization is testing incumbent supplier relationships. The sourcing teaminvolves the people who use the things bought, and the executives who managethe overall cost. The consumers will accept cost reductions as long as theprocess is: started in another department; doesnt mean change in suppliers; and doesntjeopardize a good relationship with the supply base. The executives are the pursuit of cost improvement and usermentality of resting change. To mobilize users and executives support for thecategory sourcing strategy, all the benefits and overcome any potential risks.What alternatives exist to competitive assessment? Thestaffs can harness those forces to leverage better pricing hence useful to setup a collaborative programme that will run until the next competitive sourcingevent takes place and if the competitive approach isnt viable hencethe staffs should consider alternatives such as collaborating with suppliers soas to: reduce complexity and increase productivity, create corroborativeprocess improvements, change the structure of the relationship such as newtechnology or process improvements.Prepare RFx Request for proposalThe staffs should define and make clear the requirements toall the prequalified suppliers and implement a communication plan to attractmaximum supplier interest, ensuring that that the supplier is aware ofcompeting field. Once the RFP is sent to supplier they are given enough time torespondSelection. This is the staff selection and negotiating withthe suppliers, evaluation criteria to the supplier response. If any additionalinformation is required they can enquire, negotiation is conducted first with alarger of suppliers then narrowed to finalists. Staffs should compare outcomes interms of total value; departments affected can be brought to the finalselection process by briefing the senior executives so as to gain approval andgiven a rationale behind the decision.Communication with the new supplier. The staffs shouldinvite the supplier to participate in the implementation recommendations. Communicationplan is to be developed an important to measure the supplier performance in thefirst weeks.2.a DECISION MAKING PROCESS IN CAPITAL BUDGETINGDECISIONS.Brainstorming. Investment ideas can come from anywhere thatsfrom topor bottom of organization from any department financial area or the awhole companyProject analysis. Gathering information to forecast cashflows for each project then evaluating project profitably.Planning. Company must organize profitable proposals into acoordinated whole that fits within the companys strategies and projects timingPerformance monitoring. In a post-audit, actual results arecompared to plant or predicted results and any difference must be explained.post auditing capital helps in monitoring the focus and the underlay capitalbudgeting process.2.b Techniques used in capital budgeting decisionsPayback period. It is very intuitive and easy to calculate,the amount of time until the initial investment is removed i.e. a project costa 100 dollars and we own 20 dollars(after tax) a year we will have our 100dollars in 5 years.Net present value. This calculation of time value money and alsoused to value stocks and bonds. Discounting of all the cash flows for aninvestment to the present, adding inflows and subtracting outflows. The largerthe NPV the more the financial value the project adds to the company. It givesthe project amount of value that a project will add to the EEC. I.e. if the NPVis less than zero reject the project.Internal rate of return. It is the return we will receive onthe life of our investment, calculated at a discount rate I which the NPV isequal to zero. The rate that makes the present value of cash flows is equal toinitial investment. If the rate we earn is more than the rate it cost us thenwe should undertake the project as it adds to corporate value if less than whatit cost us then the project subtracts from the project value. If IRR is greaterthan the cost of capital one should undertake the project.If IRR is greater than the cost f capital (IRR>WACC)accept, if IRR is less than the cost of capital (IRR<WACC) reject 3.a HOW TIME VALUEOF MONEY AFFECTS CAPITAL BUDGETINGTime value of moneyhelps small business to adjust cash flows forthe passage of time .It also helps in understanding some common capitalbudgeting techniques that use the timevalue of money can help understand why these project is important. Time valueof money helps the NPV to determinewhether a project is profitable afteradjusting for the time of money. This process known as discounting to presentvalue ,occurs for the preference of the dollars received today and dollarsreceived tomorrow.3.b WHY EECCOMPANY SHOULD USE CAPITAL BUDGETINGEEC company should usethe capital budgeting .EEC will use capital budgeting to support growth or toreplace odd assets ,use of capital budgets to plan what, when and how to findthese investments for capitalizing some large expenses. It is also used toraise large sums of money to invest in long term assets, it usually exceeds one year,often spinning two or more fiscal years often where regular organizationscovers one fiscal year. Capital budgeting helps to develop strategies goals i.ebeing aware of year available resourcesand potential needs is paramount to success. Capital budgeting facilitatescommunication streamlined across alldepartments and within teams createstransparency ,accountability and discretion. Capital budgeting is used to justify decisions, it maybe an ordinary band or superintend or c-level leader who must approvedecisions to have a means of deliveringfinance ,resource and needs to enable appropriate decision making process forcategory projects as acceptable and unacceptable.