Question

How can a company finance a significant capital investment project? Why would a company choose one financing option over another?

Answer 1

Ans:-

(1).

There are two sources where an organization would back its critical capital speculation project.They are two :

(a) . Inner sources ( value financing )

(b) . Outer Sources (Debt financing)

(a) . Inner sources ( value financing ) :-

• Inner sources are reserves which are accumulated inside the business tasks.
• for instance : Every year benefits can be held for future uses and furthermore it can offer its advantages when it wound up old and of no utilization.

(b) . Outer Sources (Debt financing) :-

• Outer sources are those accounts which are acquired outside the business.
• For instance : Creditors and advances from banks .

Outside sources can be of two sorts :

(i).Short term Sources of outer fund :-

• Here and now sources are just for a brief period.
• Barely any model include: overdraft office from banks, acknowledges likewise usually alluded as exchange credit, Factoring of bills.

(ii). Long haul wellsprings of outside fund:

• Long haul sources are those whose fund and reimbursement are for longer period.
• Precedents incorporate :- Long term credits from banks, Debentures , Mortgages , Grants got.

(2):-

• It is essential for each business to maintain in the focused condition.
• So it ends up vital for each organization to back its business.
• The organization needs to settle on picking the back which will be focal points to the organization over the long haul.
• it is possible that they need to settle on to pay an advance back or issuing offers of stock to investors.
• Obligation financing has its own preferences like :

1. Money lender of the back won't have any case in the abundance benefit of the matter of what has been left over subsequent to paying his obligation.

2. Loan fees are foreordained and it serves that these costs Can be forecasted by the organization ahead of time and made appropriate moves to reimbursement.

3.Funding an obligation is anything but a confused one as there are no laws to agree to Value finacing has its very own favorable circumstances like :

1.it can be reimbursed to the proprietors at their desire and there is no particular time confine for reimbursement

2.the littler the obligation value proportion, the more sheltered the organization is working. the business can withstand a restricted measure of obligation.

3.There is no compelling reason to vow resources for the loan specialist of funds as they are the proprietors of the Business.

Both the alternatives must be investigated and assessed before picking a choice as this will affect the future tasks of the organization .