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All agency action can be classified in three categories: quasi-adjudication: order making, judicial quasi-legislation: rulemaking executive
Posted On: Nov. 22, 2017
Author: Shipra


FRIEND REPLY Sholonda Clark 1. Based on your knowledge concerning capital budgeting, discuss several factors that would increase the risk associated with a company"s capital investment decision. In your opinion explain which factors increase the risk more than others. A. Project Risk-Project risk approximates the chance that the project will not be as profitable as expected due to errors from the company or from the project"s initial evaluation. Project risk is increased when a company invests in a business that is not in its area of expertise. B. Market risk measures the part of a project"s risk from macroeconomic factors such as inflation and interest rates. Market risk is increased during a weak economy. A poor economy can decrease demand for a product, potentially turning a project unprofitable. C. International Risk If a company"s capital budget project will involve another country, it will be exposed to international risk. This entails political and exchange-rate risk of the project. If currency rates move in an unfavorable direction, the company could face higher relative costs and lower relative gains. 2. Based on you knowledge concerning capital budgeting, discuss several factors that would decrease the risk associated with a company"s capital investment decision. In your opinion explain which factors decrease the risk more than others. A. Payback Period A number of capital budgeting valuation methods exist. The payback period method is a simple capital budgeting technique that involves calculating the number of years it will take to recover the initial cash invested. The investment alternative with the quickest payback is preferred. B. Internal Rate of Return -The internal rate of return is another type of capital budgeting technique. It measures the yield on investments by discounting the present value of all cash inflows against the sum of all cash outflows for an investment to determine the earnings over the life of a project. C. Discounted Cash Flow -The discounted cash flow method takes into account the time value of money by discounting an investment"s future return to a present value. The premise of the time value of money is that a dollar in-hand today is worth more than the same dollar in the future. 3. Capital investment decisions are often incremental, involving cash flows over multiple periods. Therefore, procedures must be in place to monitor the progress of projects. One such procedure is the Milestone approach. Conduct a preliminary search to explain how this approach works and why the approach can sometimes be ineffective.Milestones are useful tools in planning and scheduling. They may have been used at a high-level to present the overall project plan. Alternatively, they may be used tactically to identify completion of significant achievements, identify cross-dependencies, then subsequently provide a control and reporting mechanism during the project. 4. To what extent have you seen evidence, what economic conditions have prompted American businesses to reevaluate their traditional approach to capital investment decisions? A. Liberal Lending Practices is one of the economic conditions that an American business has reevaluated its traditional approach to a capital investment decisions? In a growing economy with high employment rates, banks are more likely to lend to consumers and businesses with reasonable rates and liberal repayment terms. When an economy begins to contract, banks and other lending institutions will tighten up lending policies, making it difficult to borrow for home buying purposes or to start or grow a business. B. High unemployment levels can result from an economic crisis in action or can be one of the causes of it. An economic crisis can occur when high interest rates, tight lending and a decrease in consumer spending results in companies letting go of employees to survive the economic downturn. http://smallbusiness.chron.com/factors-increase-riskiness-capital-budgeting-project-15829.html http://www.epmbook.com/planning.htm http://www.economywatch.com/business/global-business-strategy.html http://smallbusiness.chron.com/basic-factors-economic-decision-making-3944.html http://smallbusiness.chron.com/economic-crisis-factors-1720.html Wanda Mason-Ballenger(3 posts) The definition of “Capital Investment” according to Investopedia (2015) indicates that funding bestowed upon a business to further their objectives, vision or mission is considered a capital investment. When a business acquires assets, of the capital or fixed nature, with the intention of maintaining productivity for a period of time, these are considered to be capital investments. A plethora of sources exist, including, but not limited to banks and other financial establishments and investors of the angel, venture capital and equity varieties. Capital investments are utilized for long-term assets and can also be utilized as working capital. Any investment has some risk attached to it. The risk associated translates to not receiving the capital, or money that one has contributed to the cause, capital risk. More stringent measures have been initiated for protection against a bank failing. The stock market can be even riskier and one may lose all or part of that which is invested. Normally, in the instance of capital investment risk, the greater the return on investment the greater the risk due to high volatility, one’s capital may sustain growth or fall significantly. To attain one’s investment goals, a balance must exist between the amount of capital expended and the level of return required (Which? 2015). Not only are funds subject to risk, a company stakes their reputation in potential jeopardy by virtue of the required transparency and the evaluation process that takes place in the event it is needed, as it would apply especially, to large capital-intensive projects with respect to market volatility. Other factors that increase risk are issues that may arise with partners and contractors, the possibility of labor conflicts and the abundance of health, safety and environmental regulations that impact a capital investment. Often time one may encounter difficulty obtaining financing and the associated expense may prove to be prohibitive (Culp, S. 2012). A multitude of factors exist and cause uncertainty when valuing a business investment. Capital budgeting enables one to calculate the financial viability and reveals project valuation as impacted by cash flow projections. Prospective cash flows obtain a discount according to the required rate of return. A comparison can be formulated applying dissimilar potential risk situations and with minor tweaking of the formula for the capital budget, a comparison can be devised for specific risk conditions and considerations. There are four phases that one can follow to complete this daunting task. First, enlarge the rate of return discount factor required as it applies to cash flows. This amendment reduces the valuation of anticipated cash flows. This will reflect as higher uncertainty. Second, lower future cash flows with a loss percentage estimate. This amendment involves the likelihood of anticipated return not occurring. Third, postpone cash flows per annum. This poses a reduction in value and increases larger discounts if delay occurs. Lastly, deduct the elevated start-up expenses from the net present value estimation. It is all about the cash flows and following these directives can reduce the risk that exists and parlays a more accurate synopsis of risk exposure (Small Business Chron, 2015). References Culp, S. (2012), Forbes, Managing capital in a high-risk world as retrieved on 13 August 2015 from http://www.forbes.com/sites/steveculp/2012/05/29/managing-capital-projects-in-a-high-risk-world/ Hearst Newspapers, LLC (2015), Small Business Chron, How to adjust for risk in capital budgeting as retrieved on 14 August 2015 from http://smallbusiness.chron.com/adjust-risk-capital-budgeting-10326.html Investopedia (2015), Capital investment as retrieved on 13 August 2015 from http://www.investopedia.com/terms/c/capital-investment.asp Which? (2015), Understanding investment risk as retrieved on 14 August 2015 from http://www.which.co.uk/money/savings-and-investments/guides/understanding-investment-risk/capital-investment-risk/