Question

Final Scenario

You're a recent graduate of Champlain College and landed a great job in New York as a junior financial analyst for Chuck Schwable, a leading investment firm whose name bears no resemblance to a well known investment firm. Schwable has recently been hired by Giggle, a leading tech giant, to provide some capital budgeting recommendations for a major building project in downtown Manhattan. This is it...it's your big chance to make a great first impression and show off the skills you gained in your MGMT 240 finance class.

The senior financial analyst in your office asks you to provide a general synopsis of three common capital budgeting techniques: payback analysis, discounted cash flows analysis, and throughput analysis. Your synopsis will be presented to a small group of very important Giggle stakeholders who know nothing about capital budgeting.

For your synopsis (use fictitious data, if applicable):

1. Describe each technique and how it pertains to making capital budgeting decisions
2. Explain the benefits each technique has

Answer 1

Payback analysis is mainly a mathematical method that is employed to find out the payback period for any sort of investment. The payback period can be seen as the total time that is required by an investment to receive the entire pay off the investment with the help of the cash obtained from the project or the assets. This method plays a significant role in decision making to determine the level of risk in any investment. The management can use this method to find out whether a certain investment can be recovered within a certain time period with some sort of profits. If there is a shorter payback period, it will indicate that the investment is less risky.

Advantages=

This is easy to understand

It can be used to adjust for the different types of the uncertainty of later cash flows.

It can be used to manage the risks involved in the investments.

Discounted cash flow analysis can be seen as a method of valuation that is implemented to find out the value of the investment depending on the future cash flows. The main focus of this method remains on finding out the value of the investment at present depending on the estimation of the amount of money that can be generated in the future. This can be used for both the financial investments for the common investors and the businessman who are trying to invest their funds.

Advantage=

This method implements the time value of money

This can be used to find out the realistic or actual risk involved in the project

The main focus of the throughput analysis is to determine the impact of the investment decision in terms of its effect on the complete system in place of focusing on certain areas where the investment is made. This is based on the concept that the majority of the product costs will remain unchanged at the level of individual unit production. During the production of a unit, there will be only related costs incurring. The rest of the costs associated with the production activity and thus they will keep on incurring in when there is no production at all.

Advantages=

This can be used to find out the exact cost of any project or investment

This is useful for the accumulating costs for cost plus investments

This can also be used to find out the ongoing cost of a current investment