SLP: Capital Budgeting With Funding Sources - Risk, Cost, Politics, Public Relations

Capital budgeting with funding sources
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Capital budgeting with funding sources
Capital projects often require a significant amount of money in funding, over half a million dollars, as well as extensive debate with regard to whether or not they should actually be pursued. This paper describes a potential capital project for the company and the possible problems that may be encountered in getting the financing to see this project through. Furthermore, this paper describes two projects/events at the company which required an investment. One of these projects/events is a current project whereas the other one is a long-term investment project. For each of these projects/events, the preferable source of funding is described.
Part 1: A new wing to the building
The company is growing rapidly and there is a need for a new wing to the existing building. This capital project requires funding. In estimating cash flow which may be coming from this initial investment, the problem that may be faced is risk. Capital budgeting basically entails evaluating and selecting long-lasting investments basing on their costs as well as their possible returns. Cash flow estimates are utilized in determining the economic feasibility of a long-term investment. To estimate the cash flows of the project, the main methods that can be used include non-discounted cash flow and discounted cash flow (Cole, 2013). When determining a project’s viability, the discounted cash flow techniques account for the time value of money. Such methods include the profitability index, internal rate of returns, and net present value. On the other hand, non-discounted cash flow techniques do not account for the time value of money – such techniques hold the assumption that the value of the dollar would stay constant during the economic life of a capital investment (Cole, 2013). An example of this technique is the payback period.
Risks may affect the estimating of cash flow emanating from the new investment in that unexpected and expected setbacks might derail or disrupt the accomplishment of investment goals. In essence, a capital budgeting risk refers to the probability of a long-lasting investment failing to produce the anticipated cash flows (Gibson, 2010). The risks may be the result of imperfections in future cash flow estimates, a situation which would expose the business to likelihoods of embracing loss-making projects or capital investments. As such, it would be important to constantly examine such possible risks and employ the relevant and pertinent risk premiums – to be exact, the appropriate rate of returns which the company must earn for embracing the additional risks.
In getting the project funded, the possible problems that may be encountered include politics and cost. Cost: the capital project may require a certain amount of capital in financing that may not be available. In other words, the problem of insufficient financial resources for the project may arise. Poor cost estimates during planning of the project may bring about problems with cost. The company may try to deal with this problem by cutting costs but at the same time ensure that the project is completed on time and delivers ...