Capital Budgeting Analysis Research Articles

An additional analysis on operating leverage estimation methods

Purpose – This paper aims to identify the more accurate method of estimating a firm’s degree of operating leverage (DOL) between two popular DOL estimation techniques: that proposed by Mandelker and Rhee (M&R), and that proposed by O’Brien and Vanderheiden (O&V). Design/methodology/approach – O’Brien and Vanderheiden argue that M&R measure growth in operating earnings relative to the growth in sales rather than DOL. The authors estimate the relative growth estimate, RGE, from the O&V technique (operating earnings growth rate/sales growth rate) and compare this with the DOL estimates from the M&R technique to see if they are similar. Findings – The authors find that the DOL estimates from the M&R method are indistinguishable from the relative growth estimates from the O&V method, providing the first direct evidence that O&V’s critique is correct. The M&R DOL estimates primarily measure the growth in operating earnings relative to the growth in sales, not DOL. Originality/value – A firm’s DOL is a determinant of its common stock’s systematic risk, which determines a firm’s equity cost of capital. The equity cost of capital is a fundamental part of capital budgeting, capital structure and stock price analysis. Accurately estimating a firm’s DOL is important to researchers and corporate financial managers. Existing diversity in DOL estimation techniques raises questions about the validity of various techniques and limits comparability of existing studies. This paper demonstrates why the O&V technique should be used in place of the M&R method.

English

This study aims to analyze the capital budgeting practices used in port company in Brazil and another in Spain from a comparative perspective. To meet this objective an empirical research was conducted to study these two ports and a questionnaire was administered to collect data. The results showed that the Brazilian port uses only the internal rate of return for capital budgeting analysis combined with the random rate to determine the minimum acceptable return, and scenario analysis to assess investment risks. The Spanish port, compared to the Brazilian one, uses all methods, including payback, internal rate of return, net present value, real options valuation, and weighted average capital cost to determine the minimum rate of return, and scenario and sensitivity analyses, simulation, and decision tree to assess investment risks. Key words: Capital budgeting, techniques, port, Brazil, Spain.

The implementation of capital budgeting analysis for distributed generation allocation problems

For the last 7 years, the Republic of Croatia has been witnessing a sudden increase of distributed energy resources connecting to its power system. However, a significant problem is how to find the financial equilibrium which will satisfy the independent power producers on one side and the distribution system operator on the other. In this paper, the authors discuss the capital budgeting analysis of distributed generation projects with a goal of maximizing their net present values. The evaluation of net present values will be the central tool for finding the optimal position and size of distributed generation units in the network. By simultaneously minimizing active power losses the interests of distribution system operator will not be neglected in this study. The power production of distributed generation and power consumption of network loads will be modeled with characteristic average daily power curves with discrete hour intervals. The problem will be solved using genetic algorithm, and realized in Matlab programming environment.

Biomass Yield Enhancement Required for a Replacement Switchgrass Variety

For perennial grasses such as switchgrass (Panicum virgatum L.) used to produce biomass for biorefineries, the replacement of an existing stand with a new variety may require the loss of a year of production. If the opportunity cost of production is considered, a new cultivar (challenger) expected to result in only a modest yield increase relative to the existing variety (defender) may fail to achieve the clearly superior criterion required by variety release committees. The objective of the study is to determine the minimum expected yield increase in a new switchgrass variety that is required to economically justify the replacement of the defender. An economic model based on capital budgeting analysis is developed. Sensitivity of the expected yield increment was examined with respect to the discount rate, biomass price, field costs, and planning horizon. Results were obtained for estimated defender yields of 16.25 and 24.0 Mg ha−1. The required yield increment is inversely related to the length (years) of the planning horizon and to the price of the biomass and is positively related to costs and the discount rate. For the base parameter levels, (a defender yield of 16.25 Mg ha−1, biomass price of US$53 Mg−1, discount rate of 5%, and planning horizon of 20 yr), a 15% yield increase of 2.4 Mg ha−1 would be required to justify replacement. Economic assessments are important to both producers and breeders when quantifying yield targets for enhanced cultivars.

Financial Appraisal of Long Term Investment Projects: Evidence from Ethiopia

The main objective of this study is to investigate the financial appraisal practice of Ethiopian firms in their long term investment decision. To achieve this objective, primary data were collected from 109 sample firms using questionnaire. In addition, interview was conducted with key informants from selected organizations. The results of the study revealed that Traditional payback period was the most frequently used capital budgeting technique and sensitivity analysis is the most frequently used risk analysis tool. About two-thirds of the respondents use at least one capital budgeting and risk analysis tools in evaluating capital projects. There is no significant difference among the different types of firms in their choice of investment appraisal techniques.

Profitability and sustainability of photovoltaic energy plants in Spain

This paper reports on capital budgeting analysis to assess investments in renewable energy photovoltaic systems in Spain. Standard profitability indicators such as net present value, payback time and internal rate of return are applied to such investments. Two main issues have been taken into account: the changes taking place in the recent history of energy policies in Spain as well as the evolution of related technologies. Despite variation in incentive policies, we show how both technology and market have been able to overcome the lack of long-term policies, and even nowadays, photovoltaic energy systems can still be regarded as a profitable investment from an economic viewpoint, even in absence of any kind of incentive.

Sustainable Development With Renewable Energy in India and Pakistan

The development and massive use of renewable energy depends on two main factothe use of Reuse rs: progress of related technologies and dedicated incentive policies. Improvement of technology is highly dependent on the amount of founds dedicated to the related R&D. Long-term incentive policies that address favoring investment are also essential to achieve general progress and a widespread use of clean energies. However, the latter scenario is not always available and in some countries, and confusion emerges as stable incentive policies are lacking. In this paper we show a capital budgeting analysis of standard investments in renewable energy photovoltaic systems in two developing countries such as India and Pakistan. Standard profitability indicators, such as net present value, payback and internal rate of return, are applied to such investments. The production of electricity through solar energy is sustainable from both economical and ecological point of views. This can be an additional advantage for developing countries like India and Pakistan, as they have much of their electric network still under construction. Despite the lack of incentive policies, we show how the technology and the markets are nowadays enough mature to consider photovoltaic systems for electric energy production a profitable investment from an economic viewpoint.

Entrepreneurial ignition of the business cycle: The corporate finance of malinvestment

This paper provides an extension of the Austrian Business Cycle Theory (ABCT) framework by integrating corporate capital structure, the monetary policy transmission channel, and capital budgeting analyses. In this manner, the paper presents the business cycle as being exogenously set up by central bank authorities, but endogenously set off by commercial banks and enterprises making use of central bank-distorted market signals. The cyclical boom is modeled as a gradual process where both latitudinal and longitudinal investment expansions are possible with either internal or external finance. Bank credit creation, although a necessary condition for igniting the boom, is diversely transmitted to the economy because of heterogeneity in entrepreneurial misjudgment, corporate capital structure strategies, and the class of projects available to the enterprises.

Market states and momentum in sector exchange-traded funds

We provide a clean out-of-sample test of momentum effects by focusing on a new sample period and a new set of test assets. More specifically, we examine market states and momentum in sector exchange-traded funds (ETFs) in the post-2000 period. Our results suggest that there is no momentum in sector ETFs, and that momentum does not depend on market states in the recent decade. Our findings have important theoretical as well as practical implications. In terms of theoretical implications, models attempting to explain momentum now have a higher hurdle to meet in that these models need to explain why momentum does not seem to exist in the recent decade. In terms of practical implications, our findings suggest that in capital budgeting, portfolio evaluation, investment and risk analysis decisions, caution should be exercised in using the models that take into account momentum effects.

An Empirical Insight into Different Stages of Capital Budgeting

In today’s highly turbulent and volatile business environment where companies are exposed to a multitude of risks, only globally competitive and professionally managed companies can thrive and grow. In such a competitive environment, the capital budgeting decisions made by a company are critical to a firm’s long-term survival. Is the Indian corporate sector using theoretically sound and sophisticated capital budgeting techniques for decision making purposes? Are the Indian firms adopting risk analysis techniques for handling various risks in investments? These issues have been the focus of research studies over the past so many years. The most prevalent emphasis of previous capital budgeting surveys continues to be mainly on financial analysis and project selection stage of capital budgeting. The article reviews the past capital budgeting survey literature till the year 2012 and brings to light some of the neglected areas of capital budgeting. It is noticed that project definition and cash flow estimation (identification and development) (Stage I), project implementation (Stage III) and project review (post audit and control) (Stage IV) are the specifically neglected areas of the capital budgeting process. Further Indian studies encompassing the overall stages of capital budgeting process still remain relatively unexplored. The main aim of the present study is to not only provide an insight on the past literature, but also explore the CFOs opinions and perceptions about the relative difficulty and significance of different stages of capital budgeting in India, particularly in an era of full-fledged globalization and cutthroat competition, where companies are being exposed to various degrees of risk. The study is based on a primary survey of CFOs of 77 Indian companies listed on Bombay Stock Exchange. The study further endeavours to evaluate the impact of different company related variables of size of capital budget, nature of industry, company age, CEO education and CEO age on the level of difficulty of different stages of capital budgeting.

Capital budgeting in Europe: confronting theory with practice

Capital budgeting is an important area of financial management. It is a process used to determine whether firm's long–term investments are worth the funding of cash through the firm's capitalisation structure. Different techniques are used: the payback period, the accounting rate of return, the present value and the internal rate of return and the profitability index. This research presents an analysis of capital budgeting in three different countries: Italy, France and Spain. The results revealed that PP, followed by net present value, is the most used method, but there is a difference between large and small firms. This research has demonstrated that capital budgeting decision–making is a complex process and that it is undervalued by SMEs. The limitations of the paper are the result of its very nature: it is a largely conceptual paper.

Analisa investasi dengan Feasibility Study untuk meningkatkan Kecerdasan Finansial pada Budi Daya Ikan di Sidoarjo

Potential of each region in Indonesia from region to region and different. Indonesia has many islands and is surrounded by sea certainly has the potential of natural resources are not unlimited. One of the areas in Indonesia that fish is also a producer of Sidoarjo regency. Sidoarjo regency in East Java is located between two major rivers namely River Porong and Surabaya River so famous as the city of Delta. Which of the three investment potential of the aquaculture of milkfish, shrimp and Tilapia vaname who earn higher incomes?, Does investment analysis with feasibility studies to improve financial intelligence on aquaculture farmers. Whether or not a project implemented successfully in this case could provide economic benefits or provide financial benefits to the company the necessary analysis or assessment of the situation and the prospects of a project taking into account several criteria such as objectives, benefits and aspects related to the project in research project feasibility analysis. To find out more about the three types of resources are then conducted a field study. From the data collected by the theory of feasible study capital budgeting and financial analysis, data is processed to find out from the three farms that produce high profits. While the capital budgeting analysis that is used is the net present value (NPV), internal rate of return (IRR), payback period (PP), average rate of return (ARR) and Profitability Index (PI). From the calculation results can be seen that when viewed from the side of the capital vaname shrimp cultivation requires a smaller capital. in terms of earnings before interest and tax of tilapia aquaculture generate greater revenues. Pay back period of milkfish cultivation period of more rapid return of investment when compared with the cultivation of other woods. Internal rate of return calculations show that the cultivation of fish internal rate of returnnya higher than other cultivation. If you look at the results of the study fish ponds can be used as an investment option, because the investments are in need of smaller and faster payback periodnya. Another thing that underlies this selection of fish culture management easier and more powerful survival compared with other cultivation. Keywords: Investment Analysis, Fisheries, financial intelligence.

Using SAP R/3 To Teach Fixed Asset Accounting And Business Process Reporting

This paper describes a simulation model specifically for the Financial Accounting Information Systems course an SAP enabled course for junior Accounting majors. Supporting and measuring the Supply Chain through technology is a key goal of Accounting and should therefore be reflected in an Accounting curriculum. It will assist students to learn both the benefits, and costs, involved with implementing ERP software. The purpose of this case is to present students with a set of business scenarios, and allow for the students to make educated and knowledgeable decisions using the SAP R/3 software. The scenarios will act as a simplified replication of the business environment; thus, they will provide the students with an integrated learning experience. Students make business decisions to ensure the profitability and cash flow of their respective product lines. While making these decisions, students participate in the application and analysis provided by IDES, the simulated company integrated into the SAP system. Eventually, they will need to justify the existence of their division by presenting profitability analysis. To provide a learning-by-doing experience, the scenarios will be used to demonstrate the reporting functionality within IDES. Todays global economy is putting a premium on the ability of students to evaluate a broad range of decisions in collaboration with adaptive supply chains. A critical component of the evolving accounting curriculum lies in the ability to extend students beyond the numbers to evaluate the effective and efficient delivery of these supply chains. This paper includes our Fixed Asset Explorer Scenario, as well as a Capital Budgeting Analysis using Microsoft Excel.

Evaluating the Impact Of Foreign Exchange Rate Risk On The Capital Budgeting For Multinational Firms

Capital budgeting analysis has evolved to the point where large firms universally use sophisticated capital budgeting techniques.[1] However, small firms are less likely to use sophisticated capital budgeting techniques.[2] Even large firms do not generally use simulation for risk analysis in multinational project capital budgeting analysis.[3] This paper provides a discussion and example of the use of simulation in evaluating the impact of foreign exchange rate volatility on multinational project capital budgeting analysis.[1] Bierman, Harold, Jr. Capital Budgeting in 1991: A Survey, Financial Management, Autumn 1993, pp. 21-29.[2] See, for example, Block, Stanley. Integrating Traditional Capital Budgeting Concepts into an International Decision-Making Environment, The Engineering Economist, 45(4), 2000, pp. 309-325 or Graham, John R. and Campbell R. Harvey. The Theory and Practice of Corporate Finance: Evidence from the Field, Journal of Financial Economics, 60, 2001, pp. 187-243.[3] See, for example, Farragher, Edward, Robert Kleiman, and Anandi, Sahu. The Association Between the Use of Sophisticated Capital Budgeting Practices and Corporate Performance, The Engineering Economist, 46(4), 2001, pp. 300-31, Ho, Simon S. M. and Richard H. Pike. Risk Analysis in Capital Budgeting Contexts: Simple or Sophisticated?, Accounting and Business Research, 21(83), 1991, pp. 227-238, Klammer, T. Empirical Evidence of the Adoption of Sophisticated Capital Budgeting Techniques, The Journal of Business, July 1972, pp. 387-397, and Klammer, T., B. Koch, and N. Wilner. Post-auditing Capital Assets and Firm Performance: An Empirical Investigation, Managerial and Decisions Economics, (12), 1991, pp. 317-327.

The Waters Edge Apartments: Capital Budgeting In Real Estate Development

The Water’s Edge Apartments case provides intermediate finance students with an opportunity to apply capital budgeting analysis and decision- making techniques to a real estate development situation. The objective is to give students practice in identifying and estimating project cash flows to make a decision regarding the project. Students are encouraged to include basic sensitivity analysis in their recommendation.

Small wind on the farm: a capital budgeting case study

PurposeAs the interest in renewable energy increases and the number of federal and state incentives to support renewable energy has also grown in recent years, it seems worthwhile to explore the economics of using small wind energy systems to offset electricity costs on farms. The purpose of this paper is to explore the economics of small wind turbine installations on a dairy in Michigan through case study analysis.Design/methodology/approachAn Excel‐based capital budgeting model is developed that contains two sub‐modules: one that estimates the value of the wind energy based on the measured wind resource, and an investment module that includes factors such as investment cost, financing parameters, sales of electricity; grants and tax credits and tax information. Cases using 20 and 50 kW turbine systems are analyzed.FindingsThe results of the case studies show that in a favorable wind resource, the federal tax and United States Department of Agriculture incentives as well as state policies such as net metering can make wind turbines a good investment with an internal rate of return of 12.5 percent in this example. However, if the wind resource is not sufficient, even favorable renewable energy policies will not offset the lost value of the power generation, and thus a wind turbine will be a poor investment decision. Farm businesses should carefully consider all factors before investing in a wind turbine.Originality/valueThis paper is the first in recent years to combine capital budgeting analysis, wind resource data and the implications of federal and state policies to determine if small wind turbines are a sound investment decision for farm businesses.

Mobile dental units: leasing or buying? A dollar-cost analysis

The decision to acquire a mobile dental unit is based on a standard capital budgeting analysis. The next step is to determine whether to obtain the use of the mobile dental unit by borrowing and purchasing or by leasing. As a financing mechanism, leases are simply another way of borrowing money to pay for the asset. To compare lease vs. debt as financial vehicles to acquiring a mobile dental unit. An estimate for a new mobile unit was obtained. Lease and loan proposals from financial lenders were collected. A cost of capital rate was chosen for comparison. Cash flows associated with borrowing and leasing vs. buying were determined fortwo different scenarios: for profit (FP) vs. not-for-profit (NFP), at 5 years. A dollar-cost analysis was utilized to determine the option with the lowest capitalized value. There was a net advantage to buying vs. leasing for both for FP and NFP organizations. Due to tax advantages, owning and leasing were substantially less expensive for FP than for NFP. Slight decreases in the monthly lease payments would make leasing competitive to the buying approach. Exploring alternative financing vehicles may allow dental programs to expand their services through the acquisition of a mobile unit. Though programs generally own assets, it is the use of the asset which is important rather than the ownership. Dental programs can find leasing an attractive alternative by offering access to capital with cash-flow advantages.

Are Italian healthcare organizations paying too much for their public–private partnerships?

Italy's health service—the Servizio Sanitario Nazionale (SSN)—has developed Europe's second largest market for healthcare public–private partnerships. This article describes the origins of private finance for SSN infrastructure, examines the programme's scale and key characteristics, and provides a capital budgeting analysis of rates of return on 14 privately financed schemes. Excess returns are being made by the investors in these projects, and there is potential for SSN procurers to achieve significantly better value for money for the Italian people than has been the case to date.

Mobile dental operations: capital budgeting and long-term viability

The University of Kentucky College of Dentistry (UKCD) runs a large mobile dental operation. Economic conditions dictate that as the mobile units age it will be harder to find donors willing or able to provide the financial resources for asset replacement. In order to maintain current levels of access for the underserved, consideration of replacement is paramount. A financial analysis for a new mobile unit was conducted to determine self-sustainability, return on investment (ROI), and feasibility of generating a cash reserve for its replacement in 12 years. Information on clinical income, operational and replacement costs, and capital costs was collected. A capital budgeting analysis (CBA) was conducted using the Net Present Value (NPV) methodology in four different scenarios. Depreciation funding was calculated by transferring funds from cash inflows and reinvested to offset depreciation at fixed compound interest. A positive ROI was obtained for two scenarios. He depreciation fund did not generate a cash reserve sufficient to replace the mobile unit. Mobile dental programs can play a vital role in providing access to care to underserved populations and ensuring their mission requires long-term planning. Careful financial viability and CBA based on sound assumptions are excellent decision-making tools.

ANALYZE REFRIGERATOR TOOLING INVESTMENT LIVIA MODEL AT PT LG ELECTRONICS INDONESIA

For a large firm like PT LG Electronics Indonesia (LGEIN), which has resulted in high manufacturing utilization, require a few percent reductions in component prices every year. The one of potential project for cost reduction is tooling investment. After Livia is produced and the expenditure of new tooling is made, it is continually faced with the problem that current method computing profits are conventional without considering the expenditure of tooling in the long run. Finally, a firm’s capital budgeting decisions is needed because it defines its strategic direction. Four primary methods in the capital budget to decide whether or not the project should be accepted are: discounted payback, net present value, internal rate of return and profitability index. In addition, we use sensitivity analysis to indicate which factor has significant interfere with the project. The results generated that discounted payback is just 2 year 6 months less life of the project for 3 years, NPV generated positive result $3,502,387, and an IRR of this project is 25% greater than required rate of return 10% and profitability index gets 1.8 greater than 1. In sensitivity analysis shows that the project’s NPV is very sensitive to changes in sales and COGS, and relatively insensitive to changes in either growth rate or rate of return.In a method of capital budgeting analysis, Livia project could be accepted with initial investment for $4,199,288 and still more detailed analysis is required to support the expenditure.