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Using a Capital Budgeting Worksheet

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Resource: Capital Budgeting Worksheet

Choose a scenario from the Capital Budgeting Worksheet to review and analyze. Using net present value, determine the proposal's appropriateness and economic viability.

Prepare a report explaining your calculations and conclusions. Answer the following in your report:

? Explain the effect of a higher or lower cost of capital on a firm's long-term financial decisions.
? Analyze the use of capital budgeting techniques in strategic financial management.

Format your report consistent with APA guidelines.

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Capital Budgeting Worksheet

Cost of Capital

The cost of capital is one of the most important factors in deciding a firm's capital structure and hence, impacts long-term financial decision making. This is so because cost of capital directly impacts the firm's value which is related to its shareholders' wealth maximization objective. As Pagano and Stout (2004) said, "[the] idea of the "cost of capital" is fundamental to what managerial finance and accounting professionals do, directly or indirectly, as part of their participation on cross-functional decision teams" (p. 13). This means that the cost of capital pervades the entire organization and not only its long-term financial decision making process.

It is therefore obvious that "[one] of the continuing challenges in financial management is determining the cost of capital" (Cotner & Fletcher, 2000, p. 27) that will result to the most value. This means that if a higher or lower cost ...

Solution Summary

The expert uses the capital budgeting worksheets. The effect of a higher or lower cost of capital on a firm`s long-term financial decisions are examined.

See Also This Related BrainMass Solution

Environmental Accounting: Capital Budgeting

Please answer the following questions and fill the spreadsheets in the attached file.

Problem 1
Use the process and cost information provided below to assess the feasibility of the following pollution prevention projects using (only) the TCA balanced approach and the spreadsheets provided (please see the attached file).
1) Use the provided information to fill in the tables. Calculate the capital costs of each alternative, total operating costs, and incremental cash flow.
2) Calculate the present value (PV) and net present value (NPV) for each alternative.
3) Use the qualitative information provided in the background and quantitative results calculated to answer the following questions:
a. Is either option financially feasible?
b. Which is the more attractive option, and why?
Background Information:
You are the EHS manager at Tightwove Fabrics, Inc, a small, privately owned, textile dye shop providing dyed and finished fabrics to a variety of sportswear and garment companies. Most dyeing equipment is 20-30 years old. Tightwove is located within an urban center and has very little spare floor space for new equipment. The company has been notified that its POTW pretreatment program is going to start regulating the shop's copper with a pretreatment discharge permit. You researched the cost of upgrading your onsite pretreatment system to meet the new standard and determined the NPV is $40,000 for the upgrade. Management doesn't like that number and wants you to research pollution prevention alternatives for meeting the new discharge limit for copper in their industrial pretreatment permit from their POTW.
You have been instructed to look at technologies for reducing or eliminating copper in the wastewater. A review of the processes, material safety data sheets, and dye bath recipes revealed two options:
1. Find a substitute for the copper dyes, or
2. Improve the dye/fabric adhesion efficiency.
You located vendors of chemical dyes and dying technologies and received these two proposals. The company's cost of borrowing capital (i.e. the "discount rate") is 12%.

Option 1: The Blue Sky Dye Proposal
Blue Sky Chemical Company provided you with MSDSs and samples of copper-free dyes, as well as a list of references. The dyes have no copper-based pigments, and use a zircon-based pigment. The literature said the new pigment was extremely lightfast and colorfast. Color swatches included in the sales material compared favorably with the color hues used at Tightwove. A higher operative temperature and the need for a hot rinse would require some modifications to the existing dye jigs. The sales rep said that the toxicity EPA is backlogged, so the evaluation of zircon's potential toxicity will take at least 4 or 5 years. Additional information includes the following:

• Blue Sky chemicals are 10% more expensive.
• Modifications to the heating lines and piping for new hot rinses will cost $33,000.
Environmental Management
• The lack of effluent limits for zircon will decrease the need to install improvements to the waste water pretreatment system and eliminate the annual permitting cost.
• The lack of toxicity information on this product raises concerns about worker acute exposure and chronic health effects.
• Blue Sky has a 5-year lifetime due to potential changes in regulations.
• There will be no change to the safety budget.
• Increased temperatures in the tanks and feed lines may fatigue an already well-used system and could precipitate a rupture and spill.
• Annual maintenance costs will rise on the boiler that provides process heat ($3000 in labor time and $5000 in parts.)
• Some facilities using this chemical have found it difficult to maintain product quality.
• Processing time (production) will decrease 5% due to shorter drying time and will save $6,250.
• The dying process would remain unchanged and not require retraining workers.
• Water use will decrease by 10% annually.
• Natural gas costs would rise by $2500 annually, but electricity should be unchanged.

Option 2: The Speed Jet Proposal
Speed Jet is a manufacturer of ultrasonic assisted dye jigs. The company claims its technology can achieve a 99.5% exhaustion and fixing of dye molecules to fabric, even after rinsing. Typically, exhaustion and adhesion are anywhere from 80-90% in a conventional operation like Tightwove. The Speed Jet operation would require considerable modifications to the process line. The entire process is one long unit, complete with an infrared drying system and a recirculating rinse and filter system. The vendor claims product quality improves because the ultrasonics force the dye into the fibres, resulting in a richer hue. This process was also given a 10-year lifetime. Additional information includes the following:

• The machinery will cost $250,000 and building alterations $85,000.
• Tightwove can continue to use the existing dye and would actually use 30% less.
Environmental Management
• There appears to be no new risk to workers from the self-contained units.
• It will cost $2000 to dispose of the old system.
• There will be no change to the safety budget.
• Processing a variety of jobs with this unit may raise scheduling issues and require more careful monitoring of individual runs.
• Workers are concerned that some will lose their jobs. There is skepticism that this technology can work.
• Maintenance on this system is estimated at $1000/year in labor and $750/year in parts, and may require out -of-shop specialists.
• Production costs would decrease through faster processing (production) time, providing a 7% annual cost savings.
• Water use would decrease by 25% due to a more efficient system.
• Electrical use will rise to $8,000/year.
• Natural gas usage will be reduced by $5000/year.

Hint: There's nothing tricky here. Just watch your whether things are reduced "to" or "by" and double-check your answers after each calculation to make sure they make sense. Watch those signs, and only use formulas with cell identifiers (instead of numbers) to avoid miscopying.

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