Posted: February 12th, 2023

please respond to each of the following postings separately. Shawana- Hi Prof Lo

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please respond to each of the following postings separately.
Shawana- Hi Prof Lou and Class,
Which metrics and methodologies are the most useful when evaluating a capital investment? Why?
The net present value is the traditional metric used to lay out all the expected cash flow over the life of the investment with the discounted rate of cash flow to visualize what the future investment would be worth today. I would pick NPV because it is the most commonly used and it is simple to argue for the proposal to move forward if the NPV is positive. There are pros and cons with every metric or methodology. NPV has the capability to be an inaccurate measurement of overall profitability because it does not focus on the impact of the entire system of production. Best to utilize when throughput issues are not involved.
PV= Future CF/(1+Discounted Rate)^ squared by the # of periods of discounting
The most preferred metric is constraint management through bottleneck analysis so you can focus resources only where it’s needed.
How can finance leaders be more effective partners to managers and business leaders in developing capital budgets that align with the risk tolerance and mission of the organization?
Jack says not to get into a redundant argument of minimalization over a budget. Management traditionally had a motive of spending the least, and managers’ objective to advocate for the most. Trying to push the budget based on external factors is counterintuitive. Maximizing the budget using creativity to maximize your output should be the objective. Managers can counter with specifics to allocate the funds and ways to push their workforce with requested resources. To me, it’s a win to walk away that everyone walks away aspiring for far more than an agreeable figure but instead more ideas to make the team work outside the box.
What can be done to ensure everyone understands the connection between the strategy and the capital budget?
Conduct a post-installation/investment review to provide one clear delivery to managers of the intended lessons and why this investment is raised capital to consider how this impacts their future decision-making. Breaking down any barriers of confusion as to how the investment will improve the bottom line or contribute to the mission is so important. A capital budget can confuse others without explaining the entire strategy and how it aligns with the company’s culture.
Thanks,
Shawana Rapp
George W- Which metrics and methodologies are the most useful when evaluating a capital investment? Why?
The most common capital investment evaluation tools are the Payback Period (PP), Return on Investment (ROI), Net Present Value (NPR), and Internal Rate of Return (IRR). Each method can provide insight into investment options, but each also has limitations.
The Payback Period is important to look at it because it can provide insight into how quickly cash invested is recouped. A project with a shorter Payback Period could be more attractive as it would allow the cash to be recouped and available for use more quickly. The advantage of ROI over the Payback Period is that it gives you information about the total anticipated return of an investment. The disadvantage of ROI is that it does not consider the time value of money. IRR can also account for risk by adjusting the discount rate to account for the risk level of future cash flows that are projections, and therefore may have inherent risk in that they may not actually be seen.
How can finance leaders be more effective partners to managers and business leaders in developing capital budgets that align with the risk tolerance and mission of the organization?
Finance leaders need to know the big picture of their company-Financial leadership places a strong emphasis on financial analytics. With financial analytics, your business can improve visibility, anticipate ever-evolving needs, gain a more in-depth look into your financial health, and forecast with greater accuracy. It may be the key to improving your profitability and value.
What can be done to make sure everyone understands the connection between the strategy and the capital budget?
Strategy is the structure on which capital budgeting stands. Without a solid strategy of allocation and use of cash, a project will miss its ultimate mission and hence there is a chance of going out of track. The strategy holds the various components of a capital budgeting process intact.

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