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Discussion: Capital Budgeting and Financial Analysis
Review at least 2 academically reviewed articles on capital budgeting and 2 articles on financial analysis and complete the following:
A. Write an annotated bibliography of each article.
B. Based on the articles you reviewed, discuss what you learned
C. In addition, discuss how a manager would use the concepts in the articles you reviewed in managerial decisions.
Use APA throughout. Please organize your discussion as listed above.
Primary post :300 words
3 secondary post each 150 words(attach the docwho to rply)
Requirements: 3 | .doc file
Rply 1
Capital Budgeting and Financial Analysis
Annotated Bibliography – Capital Budgeting
Article 1
Peterson, P. P., &Fabozzi, F. J. (2002). Capital budgeting: theory and practice (Vol. 10). John Wiley & Sons.
This paper requires the explicit analysis over the relative role that is to be played with the formal evaluation methods in terms of the capital investment process of decision making. To address the gap, the case study analysis of the capital investment that has been made in the manufacturing organizations should be undertaken with the specific focus by identifying the role that is to be played through the formal evaluation methods in terms of the decisions that are to be taken. This shows the new evidence which would be allowing the enhanced understanding of the methods in terms of the capital budgeting decisions (Peterson et al, 2002).
Article 2
Harris, M., &Raviv, A. (1996). The capital budgeting process: Incentives and information. The Journal of Finance, 51(4), 1139-1174.
A brief discussion of the maximised model of capital investment decision-making as well as the survey data would be concerning about the descriptive accuracy that is presented in this article. The investment decisions that are presented specifically in terms of the role played by the evaluation methods in the decision-making process should be considered. The main differences here meant between the traditional model of capital investment as well as the observed behavior that is summarized with the implications finally (Harris et al, 1996).
Annotated Bibliography – Financial Analysis
Article 1
Kaufmann, R., Gadmer, A., &Klett, R. (2001). Introduction to dynamic financial analysis. ASTIN Bulletin: The Journal of the IAA, 31(1), 213-249.
This article is about the financial analysis can be done with the tools that help in assessing the trends and performance of the organization. The main essence here is that the analyst would be converting the data into the financial metrics which would be further helpful in decision making. The primary source here would include the annual report, management commentary, and the financial statements. The financial analyst here is capable of using this data along with the projections and conclusions (Kaufmann et al, 2001).
Article 2
Friedlob, G. T., & Schleifer, L. L. (2003). Essentials of financial analysis (Vol. 23). John Wiley & Sons.
The authors reviewed about basic tenet of the finance theory here is that the managers would be acting as the middlemen in increasing the shareholder value. The analyst here would require the supplement of the data that is found in the financial reports of the organization that includes the comparable organizations, industry, economy, and the organization itself. The equity analysis would be incorporating the perspective of the owner either for the valuation or the performance evaluation. The credit analysis will incorporate the perspective of the creditor (Friedlob et al, 2003).
Learnt from the above articles
There is the need for analyzing and gathering the data in making the decision that help in focusing upon different interests of the creditors and the owners. Both the credit and equity analyses would be assessing the ability of the organization that would grow and generate the earnings as well as the cash flow that is linked with the risks. This basically is replaced with the emphasis upon the growth whereas the credit analysis that basically places the greater emphasis upon the risks.
How a manager would use the concepts in the articles you reviewed in managerial decisions?
The manager here would-be making use of these articles in reviewing the managerial decisions by vertical analysis that has been constricted with the single time period with the disadvantage of losing out the comparison of various time periods in observing the performance. This could be further helpful in addressing the timeline analysis which indicates the changes that are to be taken place in the financial accounts upon the time like the comparative analysis for a three-year period.
Rply 2
Capital Budgeting :
A1.
Malenko, A. (2019). Optimal dynamic capital budgeting. Review of Economic Studies, 86(4), 1747–1778. https://doi.org/10.1093/restud/rdy043
According to this the article, distribution of internal capital is an essential part of any organization, and most of the times, it is observed that the project which needs savings are envisioned on the lower level of the organization and may have distinct wages than top-level managers. The best practices followed in the process of capital allocation in which the higher management privately monitors the acceptance of high benefited and invested projects and then central management assessments the project cost. The study shows the an important technique for threshold separation is that all the large major projects are financed independently by headquarters, while small projects are financed from managers’ spending account (Malenko, 2019).
A2.
Magni, C. A. (2019). Accounting measures and economic measures: An integrated theory of capital budgeting. Journal of Accounting & Finance (2158-3625), 19(9), 166–208. https://doi.org/10.33423/jaf.v19i19.2702
According to this article, economic measures and accounting measures are almost equaled traditionally. For instance, sometimes residual income is complained as not consistent over the period with the net present value. Accounting rates of return are typically assumed to be not a good substitute for recovery’s economic status. The article illustrates that there is a strong connection between accounting and economic measures. The accounting rate of return is considered a strong financial base and support of any project. Net present value expansion is equal to the development of properly distributed mathematical residual income (Magni, 2019).
B. Capital budgeting includes the selection of projects that are financially beneficial to any company. To have financial growth and increase productivity, it is always suggested to accept such assignments. To explain more, the projects related to charity are not considered as a good return in terms of financial and rate of return. However, it is more towards to promote goodwill and participate in the community (Magni, 2019). The first step is taken when the company is offered a capital budgeting decision to identify whether the project will add profit. In short, it is a good quantifiable to analyze the long term profit of any accepted project.
C. As capital budgeting handles multiple computations to estimate the beneficial projects, it helps managers make detailed and educated financing decisions. To analyze new opportunities, they can assess future cash flows, manage capital expenses, and process long term goals. It also helps managers identify the most
beneficial projects and generate profit for the company in the long term. Playback period, internal rate of return, project cost, and net present value are factors that managers can consider for the capital budgeting process. Once this process is in place, it simplifies the manager’s decision-making process by saving time and money (Malenko, 2019).
Financial Analysis :
A1.
Boronenkova, S.A. &Tanaeva, S. A. (2020). Strategic financial analysis of the company in the sphere of international medical tourism. Учёт. Анализ. Аудит, 7(1), 34–41. https://doi.org/10.26794/2408-9303-2020-7-1-34-41
Global medical tourism is becoming widespread in Russia in recent years, and the number of companies who provide outbound travel is also increasing though they are not matching the administration obligations. This paper aims to have a proportional assessment of the involved cost for the health traveler invention and the company’s existing economic position. The three attributes include economic, financial, economic activity, and financial activity calculation of the company. The paper suggested some guidelines regarding the company’s product to make it nationwide to increase profits and avoid the company’s bankruptcy and increase financial profitability and stability (Boronenkova&Tanaeva, 2020).
A2.
Vera Gelashvili, María del Mar Camacho-Miñano, & María Jesús Segovia-Vargas. (2020). A study of the economic and financial analysis for social firms: Are they really businesses? Revista de Contabilidad: Spanish Accounting Review, 23(2). https://doi.org/10.6018/rcsar.361531
The primary focus of this the article is to use ratio analysis to assess the financial and economic condition and based on financial data represents their strong and weak points and the the sample is collected from different 119 companies running in Spain. The companies such as social companies are the high profitable business companies, especially for their co-partners and that is the main reasons they survived in the market industry for extended run by keeping their cash flow ideal. The paper has a significant role in educational literature as it can compare two different types of social companies by concentrating on their business and fiscal structure (Vera Gelashvili, María del Mar Camacho-Miñano, & María Jesús Segovia-Vargas, 2020).
B. Any company’s performance is determined by the financial analysis process using economic data, and suggestions are also provided for further improvement. As it gives organizations perceptions and understanding of the business’s current progress and future capability, it is considered one of the significant financial processes. Basically, the economic analysis uses Excel spreadsheets to perform their work and assess the historical data. Based on it, it predicts how the company will have served in the coming years. Some methods include cash flow efficiency, rate of return, and profitability for financial analysis. Analysts need to choose best practices to perform the work (Boronenkova&Tanaeva, 2020).
C. Financial statement evaluation supports the crucial step for managers in analyzing the company performance. All business owners and managers must have proper skills to evaluate the financial statements to know the effect of making business decisions. This analysis also provides more information to managers regarding the correlation between fixed and variable costs. The total numbers of units are manufactured, sold, and total profit gained from the items sold. It assists the managers to analyze the introduction and removal of items and pricing. The proper knowledge of financial statements and the capability to understand them to give managers assistance on appropriate decision-making (Vera Gelashvili et al., 2020).
References :
Boronenkova, S.A. &Tanaeva, S. A. (2020). Strategic financial analysis of the company in the sphere of international medical tourism. Учёт. Анализ. Аудит, 7(1), 34–41. https://doi.org/10.26794/2408-9303-2020-7-1-34-41
Magni, C. A. (2019). Accounting measures and economic measures: An integrated theory of capital budgeting. Journal of Accounting & Finance (2158-3625), 19(9), 166–208. https://doi.org/10.33423/jaf.v19i19.2702
Malenko, A. (2019). Optimal dynamic capital budgeting. Review of Economic Studies, 86(4), 1747–1778. https://doi.org/10.1093/restud/rdy043
Vera Gelashvili, María del Mar Camacho-Miñano, & María Jesús Segovia-Vargas. (2020). A study of the economic and financial analysis for social firms: Are they really businesses? Revista de Contabilidad: Spanish Accounting Review, 23(2). https://doi.org/10.6018/rcsar.361531
Rply3
Annotated bibliography of articles.
Edu Pristine (2018) Capital Budgeting: Techniques & Importance
In this article, Edu Pristine outlines the techniques used in capital budgeting and its importance as well as giving examples. Various methods are used in capital budgeting including traditional methods also known as a non-discount method. He talks about the payback time and accounting rate of return method. He also describes discount cash flow methods that include Net present value (NVP) method, Internal Rate Return (IRR) and profitability index method. In an actual business scenario, these techniques are very paramount.
Brien O’Connell, (2017) Capital Budgeting. The Street.
Brien O’Connell authorized the article for the street. This article describes the street as a source of financial literacy website and financial news thus the article gives definition details. He gives a simple definition of capital budgeting as capital budgeting gives business vital financial measure mechanisms which may not be the technical definition but it is explained most simplistically. He also describes requirements for capital budgeting and its importance. In conclusion, he describes steps to carry out the capital budgeting process. These steps are exploring business projects or opportunities followed by evaluation of project cost and the last step is calculating returns on investments.
Paul Barne (1987). The Analysis and Use of Financial Ratios: A Review Article
Paul Barnes analyses the use of financial ratios for all kinds of purposes. He also emphasized the need for a firm to use industrial wide averages as targets to adjust financial ratios. He also reviewed Whittington’s academic work where he identifies two principals used on financial ratios. In conclusion, Paul Barne states that the reason ratios are used, as opposed to absolute values, as a calculated one and is mainly to facilitate comparison by adjusting size.
Prather Kinsey J, Harry Davis, Payal Chadha (2020) International Journal of Accounting research.
This article defines financial analysis as the process of evaluating projects, budgets, businesses, and other financial entities to determine their suitability for investment. It states that financial analysis is used to analyze if an entity is a liquid, solvent, stable or profitable enough to be invested in. They conclude by stating related articles on financial analysis that can be reviewed for further reading.
B. Based on the articles you reviewed, discuss what you learned
In taking any business, capital budgeting and financial analysis is very important. They provides an opportunity for the management to evaluate business proposals thoroughly and make an appropriate decision. In case business apprises individuals without an appropriate decision being made, there are high chances that a company will result in loss-making. Companies also need to use capital budgeting financial measurement techniques which are essentially important.
C. Discuss how a manager would use the concepts in the articles you reviewed in managerial decisions.
A manager of a company should use capital budgeting and financial analysis to evaluate business proposals. In doing so, a manager provides input on how much cost is involved in a certain business proposal and comparative returns. The technique is very essential where investment decision is needed. When there is more than one business proposal before the management, the capital budget and financial analysis is the most appropriate approach that helps to identify the most beneficial project.
References
Edu Pristine (2018) Capital Budgeting: Techniques & Importance.
Brien O’Connell, (2019) Capital Budgeting. The street.
Paul Barne (2017). The Analysis and Use of Financial Ratios: A Review Article.
Prather Kinsey J, Harry Davis, Payal Chadha (2020) International Journal of Accounting research.
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