Answer to Question #172779 in Management for Prabhdeep

Question

PROJECT PLANNING AND CONTROL

1. What are the various capital budgeting techniques? Discuss the usage and application of capital budgeting techniques.(please answer in 200 to 250 words)

2. Write short notes on the following: (please answer in 200 to 250 words)

(a) Financial Viability Study.

(b) Analysis for new enterprise. 

Answer 1

Question One: Budgeting Techniques 

The outmoded methods or non-discount methods of budgeting techniques comprise of Payback period and Accounting rate of return method. The discounted cash flow method entails the NPV method, profitability index method, and IRR.

Payback Period Method: This technique refers to the epoch in which the tender will produce cash to recuperate the original investment made. Usage: It is used to estimate the risks involved. Application: Payback period = Cash outlay (investment) / Annual cash inflow.

Accounting Rate of Return Method (ARR): This technique takes the responsibility for the entire economic life of a project by providing a superior means of comparison. Usage: It is used to ensure recompense of anticipated profitability of projects through net earnings. Application: ARR= Average income/Average Investment. 

Discounted Cash Flow Method: This technique computes the cash inflow and outflows through the life of an asset. Usage and application: It is responsible for the interest factor and the return after the payback period.

Net present Value (NPV) Method: In this technique, the cash inflow that is anticipated at diverse periods is discounted at a specific rate. Usage: it is embraced for evaluating capital investment proposals. Application: NPV = PVB – PVC. 

Internal Rate of Return (IRR): This is the rate at which the net current value of the investment is zero. Usage: It considers the time value of money. Application: If IRR > WACC then the project is profitable, if IRR > k = accept, and if IR < k = reject.

Question Two: Financial Viability Study and Analysis of New Enterprise

a). Financial Viability Study: To begin with, a viability study is a comprehensive study that endeavors to define how profitable a business concept is. The study also tries to decide whether it is possible to alter the concept into business creativity. It means that it can work successfully. If a business is viable, it infers that we expect it to generate a profit every year. Notably, financial viability is the capability to create sufficient income to meet operational payments, debt obligations and, where pertinent, to permit for growth, while upholding service levels. A project is economically viable if the economic reimbursements of the plan exceed its economic expenses when examined for society as a complete entity. The economic changes of the project are not similar to its financial budgets, this means that environmental and externalities influences should also be measured.

b). Analysis of New Enterprise: To begin with, enterprise analysis is an acquaintance area that designates the activities of Business analysis that yield a place for an enterprise to identify business chances, form a business architecture, define the optimal project venture pathway for that enterprise and finally, implement new business and technical solutions. Notably, the new enterprise ought to focus on comprehending the needs of the business in totality, its strategic path, and identifying creativities that will allow a business to meet those strategic aims and goals. Therefore, both financial viability study analyses of a new enterprise are very crucial in project planning and control.