WeWork, an American company, provides shared office space for startups, small businesses, and freelancers. It is...

WeWork, an American company, provides shared office space for startups, small businesses, and freelancers. It is considering to open a subsidiary in New Zealand. Discuss the factors that may affect the capital budgeting analysis of this investment. 300-400 words

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Expert Solution

The factors that may affect the capital budgeting analysis of this investment..

1. Availability of funds

All the projects are not requiring the same level of investment. Some projects require huge investment and having high profitability. If the company does not have adequate funds such projects may be given up.

2.Minimum rate of return on investment

Every management expect a minimum rate of return or cut off rate on capital investment. It refers to a point of below which a project would not be accepted.

3. Future earnings

Future earnings may be uniform or fluctuating . Even though company expects guaranteed future earnings in total which effects the choice of a project.

4. Quantum of profit expected

It is necessary to asses the quantum of profit expected on implementation of selected project. Here the term profit refers to the realised amount of projects as per the accounting records

5. Cash inflows

The term cash inflows refers to the profit after tax but before depreciation.the reason is that the recording of depreciation is a book entry and there is no actual cash outflow .Hence depreciation amount is included in cash inflows .

6. Legal compulsion

The management should consider the legal provisions while selecting a project. In case of leather and chemical industries.There are number of legal provisions created to project environment pollution.

Rahul Sunny answered 1 year ago

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