FINANCE

Finance

Finance

Introduction

Capital budgeting is an important tool for making marketing decisions for any company. The decisions that are made on the investments take time to establish, and these decisions on investments are based on the returns that these investments will make in future. Investments in projects whose profits margins are negative in long run, it is unwise to make investments on those projects. On the contrary projects with positive cash flows tends to be more profitable in long run, investments in those projects are beneficial for companies. For making investments in any projects or buying a new machine for the company, managers need to analyse the feasibility of those projects and make decision accordingly which are favourable for company point of view. I could be more profitable more profitable to invest money in the bank and earn interest, or it could be investing in any project. In this report, I will be analysing and discussing about the project for making decision on buying machine for a company on the basis of discounted and non discounted cash flows techniques. Further, different techniques which are employed for making the decision will be discussed on the basis of their strength and weakness.

Analysis

Discounted Cash Flow (DCF) technique is used to derive the financial and economic performance criteria for investment projects. As I have given task by Mary Fulton to analyse on project for buying a machine for a company, whose proposal with their initial investments and cash flows for 5 years. This report will present the best possible decision for buying a machine on the basis of different techniques employed and their benefits for the company.

The payback period

MACHINE "A" (Figures in £)

Year

0

1

2

3

4

5

Cash Flows

(80,000)

15000

25000

25000

30000

30000

Payback Period

3.5 years

MACHINE "B" (Figures in £)

Year

0

1

2

3

4

5

Cash Flows

(100,000)

35,000

40000

40000

15000

10000

Payback Period

2.6 years

MACHINE "C" (Figures in £)

Year

0

1

2

3

4

5

Cash Flows

(120,000)

25000

35000

40000

20000

10000

Payback Period

4 years

MACHINE "D" (Figures in £)

Year

0

1

2

3

4

5

Cash Flows

(140,000)

10000

20000

50000

50000

50000

Payback Period

4.2 years

The first approach that I have used is the “Payback period”, which is the non discounted cash flow approach. The payback period (PP) is described as the number of years for the project to reach breakeven point. It means that when the project is going to recover its initial investments, i.e. the number of years for the net cash flows summed up to become positive, and remain positive throughout the project's life (Baumol, 1968, p. 792). The payback period for project to buy a machine out of four options is mentioned above in table. As the payback period indicates the number of years to recover back the initial investment from a project. The lesser the duration of payback it is good for the company as it recover back its initial investment very quickly. As per the table mentioned above “Machine B” has the lower payback period of 2.6 years, which represent that if company decide to buy machine B than it would be profitable for them in long run. But the payback period is not the better approach for making decision of buying a machine, because it has some ...