Question

I have three questions that I need assistance with:

What is your interpretation of capital resources available in an organization?

What would you include in a capital request based on sound due diligence and feasibility?

What various financial justifications (break-even analysis, net present value, cost of capital, and internal rate of return) would you include and why?

I'm getting stuck in exactly how to answer these questions as I'm getting ready to work on my capital budget project. Any assistance would be greatly appreciated.

Answer 1

Capital resources which are available in organization are the productive assets like the inventory, equipment and the plant which are manmade and are used for income generation. There are basic four different kinds of capital resources like buildings, equipment, machinery and tools which are used for production in an organization. Capital resources should be the component of the process of manufacturing and required for production of products. Capital resources should be used for long time which varies as per life expectancy of resources and be manmade.

Based on sound due diligence and feasibility capital request should include minimum value of capital and maximum duration of contract. Legal constraints and environmental and societal sustainability should be maintained.

The break-even analysis determines what to sell, when to sell, helps to cover costs in business. The break-even analysis calculates the break-even point of one unit fixed costs, variable costs and revenue of sales.

Net present value is totalling of individual monthly or yearly net cash flows after discounted. High discount rates can lead to risky business and is not recommended. Internal rate of return is the interest rate which is used in the calculation of NPV and it causes the NPV to be zero. When IRR is greater than average investment opportunity rate the project permits the screen.

Cost of capital is opportunity cost of making a precise investment. The rate of return earned by placing same money in different investment with equal amount of risk is costs of capital.

Breakeven analysis, costs of capital are included as they have low risks.