Discuss two pros and two cons cons of a business applying different capital budgeting 3 page paper

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1- Companies employ different capital budgeting techniques to distribute resources for short-

term and long-term business plans. For instance, if a company would like to acquire another

business it will evaluate whether its decision is worth keeping or not. This company will evaluate

the investments under different capital budgeting methods, the payback method and internal rate

of return method.

The payback method needed less input and used for speedy evaluation of small

investments, and it is normally easier to calculate compared to other budgeting capital budgeting

methods. But it ignores the time value of money which misrepresents the true value of each cash

flow. It only considers those cash flows that you recover up until your initial investment and fail

to comprise those you might collect in succeeding years. This drawback might cause you to

forward an investment that produces strong cash flows in its later on years.

In Internal rate of return method, initial calculations are easier to perform, and it provides a

quick picture to small businessmen that which capital budgets will provide highest cash flows.

But it can show irregular values of high rates of return by overrating the reinvestment values of

cash flows. It also does not consider the size of projects when comparing two projects

It is important for a company to not only use one method. It has to use the method that provides a

true picture of returns.

2- If a business decides to apply only payback method to evaluate all corporate decision, it will

not get a true picture of future returns, and this will because future losses. For instance, a

company might be struggling to decide whether to acquire new equipment to increase production

capacity on an existing product or to invest in research and development for a new product. It

applies payback method to calculate the worth of returns but as we know, payback method does

not consider the subsequent years investment returns. So, it is possible that at the initial stage, a

business is getting lower returns, and the company decides to shut down its business but it is

unaware that may be future cash returns may be higher. So this single method does not present a

true picture of returns. It also does not consider the time value of money. Money today has more

worth but may be in future its worth will decrease.

3- A company's capital structure describes the methods the company applies to finance its

operations. It can finance through debt or equity. For instance, for a manufacturing firm that is

producing guaranteed products and has sales order of 1200 products. It has guaranteed payments

and sales. So, a debt structure is efficient for such a firm because guaranteed payments will be

utilized to pay back the debt without losing ownership in the company

Knowledge-based companies like Software have more intangible assets and more

financial risks. It has not tangible assets like plants, machinery; there is no need to take debt. So

it is better for such companies to finance internally without borrowing outside. These companies

need to maintain high liquidity to have high cash balances and avoid high leverage costs.

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1- Companies employ different capital budgeting techniques to distribute resources for short-term and long-term business plans. For instance, if a company would like to acquire another business it will evaluate whether its decision is worth keeping or not. This company will evaluate the investments under different capital budgeting methods, the payback method and internal rate of return method. The payback method needed less input and used for speedy evaluation of small investments, and it is normally easier to calculate compared to other budgeting capital budgeting methods. But it ignores the time value of money which misrepresents the true value of each cash flow. It only considers those cash flows that you recover up until your initial investment and fail to comprise those you might collect in succeeding years. This drawback might cause you to forward an investment that produces s ...
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