Pipeline Thumb Handbook A Manual Of Quick -Myassignmenthelp.Com

Question: Discuss About The Pipeline Thumb Handbook A Manual Of Quick? Answer: Introduction Capital budgeting is basically a process of choosing the best investment option. It comprises of various tools and techniques which are used by the companies in order to make evaluate their investment projects for the purpose making an efficient investment portfolio. It is regarded as the most challenging task for the management as it involves decision making regarding allocation of funds to the proposals over a period of time (Parrino, Kidwell and Bates, 2011). The report contains two parts, first part includes the evaluation of two investment options, in which MR PLC wants to invest their funds and the second part contains some multiple choice and true or false questions related to capital budgeting. The report ended with the conclusion stating about the importance of capital budgeting techniques. It is very important to modify the methods used for investment assessment, in order to cope with the trend prevailing in price movements. Inflation is that rate at which the investments real value is worn and a loss in purchasing power is there over the period of time. Rate of inflation provide investors with an idea about how much return their investments will earn, for the purpose of increasing and maintaining their living standards (Petty et al. 2015). The annual rate of return of an investment is eroded by inflation. Investors started losing money on their investment, as and when the inflation rate goes higher. A high rate also results in the increase in the required rate of return of the firms security holders. Thus, inflation does affect the rate of return of an investment to a great extent. A nominal approach used for evaluation of investment takes into account the nominal cash flows with nominal cost of capital. The nominal cash flows are the amount of revenues and expenses, the company expects to receive and pay in near future, without making any adjustments for inflation. In the situation of high inflation, these cash flows become greater than real cash flow (Bruner, 2016). A real approach to investment assessment deals with the real cash flows and real cost of capital. These cash flows are computed by deflating the nominal cash flows with the inflation rate. In other words, their calculation includes the adjustments for inflation. As inflationary situations reduces the spending power of the consumers, the real cash flows shows the effect of same on the firms cash flow. Similarly, the real cost of capital is derived by deflating the nominal cost of capital (Horngren, 2009). In order to calculate real cash flows, following equation is been applied (Bruner, 2016): (1 + inflation rate) x (1 + real discount rate) = (1 + nominal rate of return). However, the net present value of a project does not depend upon any of the two approaches in fact the value of NPV derived from real approach is same as it is derived by using the nominal approach. The reason behind this is that both the nominal cash flow and rate of return are discounted by the general inflation rate which gives the real cash flows and results in the same value of NPV (Damodaran, 2010). Calculation of NPV and profitability index Nominal rate of return (given) = 16% Inflation rate (given) = 12% Real rate of return = [(1 + nominal rate) (1 + rate of inflation)] - 1 [(1 + 16%) (1+ 12%)] 1 (1.16 1.12) 1 = 0.035 0.035*100 = 3.57 or 3.6% The required discounting rate is 3.6% Analysis of NPV and PI The calculation of NPV and PI is done to measure the viability and profitability of the investment project. Both of these are capital budgeting techniques, used by the management for the purpose of evaluating the proposals with an objective of making investments. These tools and techniques provide investors with an idea about the amounts of profits earned by their investments and also about the feasibility of the project (Kinney, Raiborn and Poznanski, 2011). Net Present value is one of the capital budgeting techniques which determine the profitability of a project. If the NPV is positive and higher than 1, the proposal should be accepted and if it is negative and less than 1, it will be better not to consider such proposal in an investment portfolio. When NPV is equal to zero, management can either accept or reject the project. Generally, the proposal having high NPV is advisable for the purpose of investment (Heisinger, 2009). Profitability index determines the relationship between the cost and benefits associated with the proposed project. If the index is less than 1, it implies that the present values of the project are less than the initial outlay. As and when, the value of PI increases the proposal become financially more attractive. So it will be recommended having a high profitability index (Lee and Lee, 2016). As far as the three projects, in which directors of MR plc wish to invest their money are concerned, it will be advisable to the management to go for project A because it has high net present value as compare to projects B and C. It also has an appropriate PI of 1.25, though less than the PI of proposal C but, the project is capable enough to generate high returns. Making investment of cash in money market at the rate of 10% will give more returns as compare to the latter projects. So, the management should opt for project A. Requirement The decision taken by the company regarding borrowing funds will definitely put limits to the investment expenditure, but the same will be in the best interest of the shareholders. As shareholders are the people who have a substantial interest in the working of business and also wanted to have a full control over the company. So decision of not raising funds from outside will benefit them to a great extent because the company will then have equity financing only. Apart from owners point of view, the company will also be benefited on a whole by this decision, as it strengthen its financial position in the market and improves its capital structure. Having the funds financed wholly through shareholders equity, will let the management of the company to utilize their earnings for setting of items other than debt. Also the shareholders will have a full control over the functioning of the company and will also get more returns on their investment. Thus, the decision taken is in the interest of shareholders, though it will limit the investment expenses. Conclusion The report concluded that it is very important for the organizations to take appropriate investment decision by using correct capital budgeting tools and techniques. By investing in the project which gives higher returns, companies will be able to increase their profitability. In addition to this, proper investment appraisal method also tells about the risk associated with each and every project and helps the management to take correct decision. Overall, the analysis helps the companies to earn more profits and to make proper utilization of their funds (McLaney and Atrill, 2014). References Baker, H.K. and English, P., 2011.Capital budgeting valuation: Financial analysis for today's investment projects(Vol. 13). John Wiley Sons. Bruner, R.F., 2016.Applied mergers and acquisitions(Vol. 173). John Wiley Sons. Damodaran, A., 2010.Applied corporate finance. John Wiley Sons. Gotze, U., Northcott, D. and Schuster, P., 2016.INVESTMENT APPRAISAL. SPRINGER-VERLAG BERLIN AN. Hawawini, G. and Viallet, C., 2010.Finance for executives: Managing for value creation. Cengage Learning. Heisinger, K., 2009.Essentials of managerial accounting. Cengage Learning. Horngren, C.T., 2009.Cost accounting: A managerial emphasis, 13/e. Pearson Education India. Kinney, M.R., Raiborn, C.A. and Poznanski, P.J., 2011. Cost accounting: Foundations and evolutions.Issues in Accounting Education,26(1), pp.257-258. Lee, J.C. and Lee, C.F., 2016.Financial Analysis, Planning Forecasting: Theory and Application Third. World Scientific Publishing Company. McAllister, E.W., 2013.Pipeline rules of thumb handbook: a manual of quick, accurate solutions to everyday pipeline engineering problems. Gulf Professional Publishing. McLaney, E.J. and Atrill, P., 2014.Accounting and Finance: An Introduction. Pearson. Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015.Financial management: Principles and applications. Pearson Higher Education AU. Parrino, R., Kidwell, D.S. and Bates, T., 2011.Fundamentals of corporate finance. John Wiley Sons.