FINCB/571: Corporate Finance Competency 2 – Reflection
Reflection
This reflection is comprised of two sections, collectively totaling a minimum of 500 words. Complete your reflection by responding to all prompts.
Capital Budgeting Techniques
You are a finance manager for a major utility company. Think about some of the capital budgeting techniques you might use for some upcoming projects.
Discuss at least 2 capital budgeting techniques and how your company can benefit from the use of these tools. Capital budgeting is the process of evaluating and selecting long-term investments in assets, such as plant and equipment, that are expected to generate future cash flows. There are several capital budgeting techniques that companies can use to help them make informed decisions about these investments. Here are two common capital budgeting techniques:
Net present value (NPV): NPV is a method that calculates the present value of an investment by discounting future cash flows to the present. It takes into account the time value of money, which means that a dollar received in the future is worth less than a dollar received today. To calculate NPV, a company estimates the cash flows that an investment is expected to generate, estimates the required rate of return on the investment, and then calculates the present value of the cash flows using a discount rate. If the NPV is positive, it indicates that the investment is expected to generate a positive return.
Internal rate of return (IRR): IRR is a measure of the rate of return that an investment is expected to generate. It is calculated by determining the discount rate at which the NPV of an investment is equal to zero. The higher the IRR, the more attractive the investment is. Like NPV, IRR takes into account the time value of money, but it also considers the reinvestment of cash flows.
A company can benefit from the use of these capital budgeting techniques in several ways. First, they can help the company make more informed decisions about which investments to pursue. By estimating the expected cash flows and required rate of return for different investments, a company can compare the potential returns of each investment and choose the one that is expected to generate the highest return.
Second, capital budgeting techniques can help a company manage its financial resources more effectively. By evaluating the expected cash flows and required rate of return for different investments, a company can prioritize the allocation of its capital to the investments that are expected to generate the highest returns. This can help the company achieve its financial goals more efficiently.
Finally, capital budgeting techniques can help a company assess the risk of different investments. By estimating the expected cash flows and required rate of return for different investments, a company can evaluate the potential risk of each investment and choose the ones that are expected to generate the most favorable risk-return trade-off.
Compare your approaches to other students’ responses. How were they similar or different? Why might you use the different approaches shared by your classmates?
Financial Performance Assessment
You are writing a book on how to evaluate performance Assessment for a company. Think about some of the influences and measures of company performance that you read about in this module.
Explain the use of return on assets (ROA) and the price-to-earnings (PE) ratio in evaluating the performance of a company. Write about how to calculate ROA and PE ratio and how market conditions can affect these metrics.
Share the ROA and PE ratio for a company you are familiar with. What do these metrics tell you about the financial health of the company?
