Question

Please describe three analysis tools that can be used in capital budgeting decisions. Which of these do you believe provides the best information and the least beneficial information? Why? Be specific. As portfolio activities are to be self-reflective, please make sure to connect the portfolio assignment to: Your personal experiences. Reflect on how this assignment topic is applicable to and will benefit you. Course readings and any external readings. Discussion forum posts or other course objectives. The Portfolio Activity entry should be a minimum of 500 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources.

Answer 1

Analytical methods, such as Net Present Value (NPV) and Internal rate of Revenue (IRR), good approaches to evaluate capital budgeting. By factoring in time value of money, those quantitative tools help evaluate and compare various long term strategies. However, as noted by Heisinger & Hoyle (n.d., p. 617), sometimes qualitative factors may outweigh and result in management decisions that are not supported or even contradict to quantitative factors. Indeed, not all elements of future planning can be expressed in numerical terms.

In my opinion and experience, augmentative methods are quite good to evaluate tactical management decisions. Tactical decisions are important for a company’s future growth, but not ane that expected to either kill or bring the company to the absolute market leadership. Usually, tactical planning operates with known and tested technologies, expected and tested the market response and other factors that easy to express in numeric form.

On the other hand, strategical decisions are often operating with such factors as founders’ vision, company reputation, company-wide marketing and similar. All those factors are either hard to predict or impossible to quantify at all. In such cases, qualitative factors are taking preference.

Let’s consider Amazon Kindle as an example. It had been introduced to the market in 2007 (Hall, 2018). By this time, Amazon already established itself as the major online bookseller, but didn’t have any experience building and selling consumer electronic product. Being a quite complicated and innovative device, original Kindles had been sold way under its production cost. Even 5 years after the initial introduction, Amazon continues to sell Kindles at the cost.,making no profit whatsoever (BBC, 2012). No NVP/IRR based evaluation can justify a long term no-profit budgeting, isn’t it?

Apparently, qualitative factors dictated such dramatic strategical decisions. In addition to already established physical books business, Kindle allows Amazon to introduce new electronic formats of books, music and video content. While recognizing operation lost in Kindle device sales (Yarow, 2013), Amazon recovers a staggering profit from selling new digital content.

But this was only a first step in apparent Amazon vision - by selling Kindle Fire devices at the operational lost, Amazon brought its online store to the hands of millions of its customers and significantly increase customers retention. According to Chaffey (2018), Amazon is generating almost $200/year from the unique user. The next contender, eBay, generates only about $40/year.

Strategy based on founders’ vision are hard to quantify and those limit use of quantitative methods, such as NPV and IRR.

References:

Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved from https://2012books.lardbucket.org/books/accounting-for-managers/index.html

Hall C.,(2018), Amazon Kindle: A brief 10-year history from the original Kindle to the new Kindle Oasis. Retrieved from

https://www.pocket-lint.com/gadgets/news/137303-amazon-kindle-history-kindle-to-the-kindle-o asis

BBC ,(2012), Kindle Fire HD and Paperwhite sales make Amazon no profit. Retrieved from https://www.bbc.com/news/technology-19907546

Chaffey D., (2018), Amazon.com case study – 2018 update. Retrieved from

https://www.smartinsights.com/digital-marketing-strategy/online-business-revenue-models/amaz on-case-study/

Yarow, J. (2013) CHART OF THE DAY: How Much Money Amazon Is Making From The Kindle https://www.businessinsider.com/chart-of-the-day-how-much-money-amazon-is-making-from-th e-kindle-2013-2