1. The calculations for the net present value can be use for the decision-making in order to select the capital investment. This is also the summation of the present value of the yearly cash flow for the project which is the total value for the total cash inflow subtracted from the initial cost of the present of the invested projects as well as the cash outflows (Smith, 2002, p. 242).
With the basis of the Net Present Value, then the project needs to be accepted because it considered being a positive inflow into the possible investment. It is also the basis that the positive net present value only means that the inflow of the cash has the higher present value as compared to the outflows.
The internal rate of return or sometimes called the time-adjusted rate of return is the earned return for the given proposal. This is also the discount rate for equating the net present value of the cash flow fort the present value into the zero cash outflows. This also signifies that the internal rate of return also assumes that the inflows are invested again in the given internal rate. The internal rate of return has also some of the advantages as it is considered to be the time value for the money and accurate and realistic as compared to the method of accounting rate of return (Shim, et. al., 2005, p. 23).
For the internal rate of return, it is sufficient to use the formula:
Where:
t = time of the cash flow
N = total time of the project
r = discounted rate
Ct = net cash flow
The Internal rate of return will be:
£9,236,633.656 = 0
(1 + r)6
£9,236,633.656 = (1 + r)6
r = 13.48%
In relation to the internal rate of return, the project must need to accept the project due to the fact that IRR is greater than the invested capital for the given investment.
Generally, the project is expected to accept to the project due to the fact that it has many advantages and has the positive return of investment which also signifies that it is an ideal investment for the company.
2. The capital budgeting is the way in making or engaging in the investment decisions for the expenditures of capital or the fixed assets. This had been done due to the fact that the continuing business firm can always moving ahead and its fixed assets as well as the resources are all continuing for the expansion or there is a great need in diversification. The capital expenditure can be an expenditure for the benefit of the expected that can be received for the period of time that exceeds one year. This capital expenditure is also considered to be one that has the intentions of benefitting in the future periods which is commonly including in the investment in the fixed assets as well as to the other development projects. This is also for the purpose of long-term function and also known as the Investment Decision Making, the capital expenditure etc (Chand, n.d., p.584).
The capital budgeting though complicated is the most important in the managerial decisions. This is because its main concerned is the carrying and designation of the systematic program of investment. This is also provides the expenditures that had provided and yields for over the number of years. According to Horngreen, the capital budgeting is use for the long term planning for the financing and making the proposed outlays of capitals. This is important because its concern is the allocation of scares of the firm in financial resources in the available market opportunities. This can also have the comparison of the expected value streams in future for the project’s earnings and the subsequent and immediate expenditure for the streams. Aside from that, it also covers the planning of development that is available in the purpose of capital and its concerns in the long-term profitability (Ibid).
There are several importance of the capital budgeting which has the single area for the decision making in management. For the large investment, it is an ample way because the funds that are available in the firm are limited and there are scare resources in the funds. Aside from that, the firms are also raised by the firm from the internal and up to the external resources that are substantial on the capital cost. For the long term commitment of funds, the capital budgeting is the need for the great planning of the capital expenditure due to the fact that the longer time can have the more risk involved. This is also important in the irreversible in nature due to the fact that once the decision for gaining the permanent asset is taken there is difficulty in the reversion of decision. There are also difficulties in finding the market of the capital goods that they acquired. For the complicated decisions of investment, this can also be use for the assessment of the future events which definitely uncertain. This can also have the significant and long-term affect regarding the probability that it concerns and its importance are the voidance of the under-investment and over-investment n the fixed assets. The decisions of investment can have the concerns in the national importance due to the determination of the economic activities, the employment and the economic growth (Ibid, p.585).
The errors in the capital budgeting can be costly and disastrous for the keep going of the firm’s survival. Aside from that, the substantial loss for the firm can experience. The poor decisions in the capital budgeting can also be costly due to the large amount of money and the long periods that involved. If ever that the poor decisions in capital budgeting had implemented, the company can lose part or the entire funds that invested for the project and cannot realized the expected benefits. Additionally, there can also have the wasted action taken as in the supplier of the raw material while being harmful also for the competitive positions of the company due to its lack of efficient productive assets if the poor decision of capital budgeting is continued. The investment of the funds can also get problems when the workers are hired for the project which can lay off in failing the project and employment problems (Edwards and Maher, n.d., p.980).
3. The payback method is the simplest process for the determination of one or more primary ideas of project. This can also tell the period in taking it’s earn back of the money that can be spend in the specific project. On the other hand, there is certain disapproval in using this method whereas; it ignores the benefits that can occur right after the pay back period. In relation to this, straight payback method also ignores the time value of the given money (Toolkit Media Group, 2008). In general, the primary criticism for the payback method is that it is theoretically incorrect because it has no consideration in the given cash flows right after the payback period, the cash flow are also not discounted and ignores the time value of the money, and it is possible for the case of the payback period to be higher than the life cycle project. There are also serous errors which can lead to the incorrect decisions. This is particularly true if there are important net cash inflows for the years and after the substantial salvage value or payback period. The other error that can find is that it is correctable wherein several number of companies had modified the past undiscounted payback methods and to the discounted payback method (Lang, et. al., 1993, p. 64).
There are also certain disadvantages which accounted in the payback method as it does not take the account of the cash inflows which can yield to the reasons that the true profitability for the project cannot be assess correctly. This method does not also consider the earnings of profit amount on the investment and after the recovery of the investment cost. It does not also take into the consideration of the cost of the capital which is an ample factor for making the decisions of sound investment. This method can also be difficult in determining the minimum acceptable period of pay back and it is primarily a subjective decision. The other disadvantage is the reason that it ignores the factor of interest which is very important factor into the act of investing decisions. It cannot also be avoided that this method can have the too much emphasis of the investment liquidity while ignoring the probability of investment and cannot be justified for the number of situations. This can also ignore the value of the money wherein the cash flows that had been received for every year are equally treated. Lastly, it does not take into the account of project life and the scrap value, depreciation, interest factor, etc. (Chand, n.d., p.586).
There are also some of the reasons wherein the businesspersons still using the payback method is because it is easy to understand and most want to have the efficient and simple method. Aside from that, it is also useful method for the quick screening for the candidates inside the process of selection wherein it is usually use in the government and in industry for the investment of short-term which relates to the replacement and to the in-house or improvements. This can also serves as the rick indicator as in the desired short paybacks so that it can ease the forecast of cash shortage. With this regard, most of the managers are aware on the future as well as the reason which in favor of the payback periods and most of them are comfortable with the payback of two-three as compared to longer that four paybacks. This also saves the cost when it requires the lesser times as well as the labour when it is compared to the other method. This can also reduces the loss with the aide of obsolescence which can be more suited for the developing countries. Most of the managers also say that it is useful for the concern of the short cash and it is also eager in getting back nto the cash of invested project of capital expenditure. With this method as well, the estimates can be reliable in the results and can also be accurate with the use of the cash flows (Lang, et. al., 1993, p. 65).
4. The term expropriation can have to take the different forms. This can include the imposition of the state for the extensive restrictions on an effective control of foreigners regarding the property. This can also have the deprivation of the interference with the intangible property which includes the contractual rights and the shareholders right which has the decisive significance to the context. The expropriation is basically the action of the government that can take away the private business from the owners or its direct way so that it can threaten the security of the property right as well as to dampen the incentives for the productive investment. This is also occurs when the countries have the property laws which are not well defined and concrete. The expropriation is also considered to be the political risk that involved in the foreign direct investment. This is also characterized by the confiscation of the foreign asset and the payment of pittance. The expropriated business also is quite established and successful and not highly risky for failing. On the other hand, the expropriation can also warrant for reasons as the peculiar in the entity of local government (Baker, J 1999, 165).
For any foreign investment, there are commonly vulnerable to the types of the risks which are the political and currency risk. These are the variations of the project which generated by the exchange rates and the economic, political, and organizational particularities of the host country. For the foreign direct investment, the expropriation is considered to be the most dramatic form of political risk though there rare in the threat of the major risk in the process of the capital budgeting. Parts of the risks in the expropriation of the foreign investment are the value of the investment itself, the volatility, and the expected growth. The expropriation of the cost of firm greatly depends on the government perceives the costs that it incur if they choose to exercise the expropriate option. This risk is also depends on the uncertainty of the endowment of host country regarding its management skills and to the number of foreign firms in the host country. The host government’s stability and attitude toward the foreign investment is the most important considerations in the decisions of investment (Hotel Online, 1999).
The political risks as well as the commercial risks are of the normal scenario in the process of corporate decision making for invested of the companies abroad. Nevertheless, there are certain points in handling these risks such as the better understanding for the investment environment and the appropriate and effective risk management. In this manner, there can have the great opportunities for the investors in making both productive and profitable investments which can also benefit the people in the development of the world. Additionally, it can also be measured on the rate of return of the investment. Part of the risks also is the inadequate regulations, failure of the enforced law, the poor ownership rights, limitations of the repatriation for the funds, and the exchange of the control restrictions. In this regard, it requires therefore the good management and the good assessment for the non-commercial risks when considering the long-term investment. In this manner, for the safety of my investment, I can use the political risk insurance which is an important instrument for the financier and the investors which can be available for the private and public entities. This can also protect the investors to the politically motivated acts or to the governmental actions which can affect the project’s viability. This can also alleviate the risk of the country which make the country neutral and can minimize the cost of financing and secured the project financing. It is also important to avoid the undertaking of the investment which is difficult to reverse or it requires the higher rates of return for the compensation of the extra risks (FDI Magazine, 2008).
5. The mergers and acquisitions is the general tern that had used in referring the consolidation of the companies. The merger is simply the combination of the two companies in forming the new company. On the other hand, the acquisition is the purchase of the company through another wherein no new company is being formed (Investopedia, 2008). The acquisitions are rarely delivering their value added wherein it expected because it exclusively sustainable and can maintain the competitive advantage value upon inhibiting entry. The controls of the bars, with trying the arrangement and the direct ownership, denies the ready access of the entrants, new geographical market entry, and the increase for the sunk of entry market. Therefore, the new entry can also occur with the joint venture, and the ability of the entrants in undermining the added value for the incumbents. According to the study Millman and Grey, the 83% of the mergers are producing mo benefit for whatsoever while the Sirower determined that the 60-70% of the acquisitions failed to produce the positive returns (Kay, 1993, p146).
In reality, it has been determined that the medium term which is less than the half the mergers and acquisitions are doing the add value. This means that the shareholder that plans to buy will be richer at the end and the shareholders of the purchasing company is seldom. The other reason also which lies to the failures of integrating the two companies right after the merger is the intellectual capital that often walks out in the door if ever the acquisition are not being handled carefully. The other reason is the traditional practice wherein the delivery value of the acquisition are better services and products when they allow the market power and the scale of economies in the learning of the new firms and in the market. This also came from the idea that the performance and value of the two companies that are merged are greater than the sum of the separate parts of individual (Mc Graw Hill Corporate Finance, 2005). As the general conclusion, the mergers usually fails to deliver the promises of the synergy and efficiency as well as delivering the seldom creation of value for the stockholder of acquirers. The synergy therefore will imply that the firms’ combination will be profitable or can have the ability to grow faster in its rate right after the merger as compared to its separate operation. There are also the reason of unexpected defection of the high customer, poor predictions regarding the market growth and the realities of competitiveness, and the entire optimistic prospects for the selling of activities (Damodaran, 2004, p. 331).
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