Assessing Capital Budgeting Process And Capital Structure Of ARB Ltd In An Essay.

1.  What recommendation would you make regarding the projects? Discuss any further information that you may require to help you make the accept/reject decision about either of these projects.

2. Define ‘product cannibalisation’ in capital budgeting decisions and address Nathan’s concerns that it should be considered

3.Address Nathan’s concerns that Saturn’s marketing department’s budgeted sales estimates may be too high. What capital budgeting options are available to compensate for such an error? 

Assessing Capital Budgeting Process of Saturn Pet Care

This paper explains that the application of the capital budgeting process has been effective enough in determining the fact that Wodonga Site is the most appropriate manufacturing process that can be undertaken by Saturn Pet Care as the figures have clearly explained that all the processes associated with capital budgeting that is inclusive of Net Present Value assessment, payback period evaluation and the profitability index. The process of assessing the net present value has indicated that future cash flow that a business expects from the manufacturing location of Wodonga Site is much higher than Bathurst Site. The figure that has been discovered for Bathurst Site with respect to the net present value has been found to be $ 58,44,567 and this value has been lower than net present value that has been discovered for Wodonga Site and their figure has amounted to $ 95,94,827. The figures related to the profitability index for Bathurst has been found to be 1.117 and this figure has been lower than the index of Wodonga in relation to their profitability and the value amounts to 1.349. The assessment of the payback period has indicated that site for Wodonga is much more effective with respect to the site in Bathurst as it permits the organization to regain the primary value that has been invested for the purpose of manufacturing at a very limited time period. Therefore, by looking at the assessment that has been taken into consideration it is seen that manufacturing process that has undertaken by Wodonga site is much more profitable.

The word “product cannibalization” is associated to a plan or a strategy, which is generally undertaken by an organization and in which in order to incorporate and advertise a fresh product in the market, it is seen that the organzaiiton looks to lower their sales of their other products (Loughran, & McDonald 2016). In accordance to Saturn Pet Care, there are possibilities that this company is making use of such a process in order to improve their new product line, which is in the mind-set of the management.

According to the question, it is seen that one of the directors of the company who is named as Nathan, has an idea that the department of marketing has expected the sales to be more and hence this error needs to be amended in order to mitigate the effect that it would have on the method of planning that is undertaken by the management (Beaumont, 2015). The error of estimation can be amended by making use of the process of net present value analysis with the help of which the estimates of the cash flow can be enhanced a bit in order to counteract the error of estimation that have taken place at a certain point of time earlier.

Concept of Product Cannibalization

The director named Nathan even has the idea that the actual expense of the factory location needs to be added within the investment that has been made initially in order to bring in a precise estimation (Unda, 2015). The point of view of Nathan is not perfect as the assessment of the net present value only regards the factory locations that have been newly constructed and this has been developed for the purpose of the option of the manufacturing locations.

This section of the paper would be looking to assess the capital structure framework for ARB Ltd and this is an organization that concentrates on the manufacturing sector and accordingly the weaknesses and the efficiency of the capital framework of the company needs to be evaluated. The assessment that would be undertaken would provide an explicit assessment of the capital model and the alterations that would place in the coming years needs to be assessed as well.

ARB Ltd discloses a capital structure and this structure explains that the organization solitarily makes use of the equity share capital within the capital bucket that has been utilised by the organization. The firm does not make use of the capital related to debt in the capital bucket and therefore it is seen that the capital structure of the firm is dependent on the equity capital. 

Weighted Average Cost of Capital also known as WACC for the concerned organization has been constructed and thereby discovering the fact that for the concerned company the WACC figure has been 30.7%. Faff, (2015) addressed that weighted average cost of capital is the aggregate of the overall expenses related to capital that is attained from several financial sources that have been utilised by the organizations. The total cost of capital for the concerned business has diminished from the projections of the last year, which addresses that the financing expenses has in certain manner diminished and this has been looked upon to be a positive symbol.

The cost of capital that is constructed with regards to the CAPM process looks to take into account various kinds of variables like the rate of return that is risk free in nature, rate of return of the market and the risk free factor that is even known as Beta (Ratiu, 2015). The cost of equity that is determined in accordance to the process of CAPM is constructed to be 7.906% and this value has been encouraging by looking at the rate of return from the market and this value has been 30.7%. This indicates that the anticipations of the shareholders have been satisfied.

Assessing Capital Structure of ARB Ltd

In order to undertake a comparison, it is seen that Modine Ltd is functioning in the similar industry as ARB Ltd and they are associated with similar kinds of business functions as well. The capital structure of Modine Ltd comprises of the debt and the equity capital and thereby this indicates that the company is looking to attain a constructive capital mix structure that would be useful in mitigating the entire risk that is related to the business (Balakrishnan et al., 2016). However, when assessing the scenario of ARB Ltd, it is seen that the capital structure of the company comprises of the equity share capital. The debt and the equity capital that is being utilised by Modine Ltd is found to be $412.20 million and the $519.90 million. This explains that the capital structure of Modine Ltd has been much better than the one that is available for ARB Ltd.

The financial ratio that is associated to the organzaiiton indicates the fact that efficiency, profitability and the ratio of solvency has been explained in the figure that has been given below. It is seen that there has been a rise in the current ratio of the organization in accordance to the projections of the last year and this explains that the liquidity scenario of the company has enhanced drastically. The other essential ratio that is required to be taken into consideration has been the debt equity ratio and it is seen that is ratio has improved from the last year and this explains that there has been an increase in the amount of debts. The other optimistic feature has been the inventory turnover ratio and this ratio has seen a rise from the last year and this seriously is a positive symbol (Linnenluecke et al., 2015).

There have been alterations in the capital structure as years have passed by and this has been observed from the table that has been provided below. In the present circumstances, it is seen that ARB Ltd only makes use of the capital mix of equity in the capital structure of their operational activities.   

The organization has been incompetent in attaining the development that has been expected from the side of the organization in accordance to what they wanted to attain (Adedeji et al., 2017). It is seen that the “NOPAT” of the company has seen a moderate rise, the firm needs to increase their stress in the optimisation of the principle of wealth.

Recommendations and Conclusion 

The advices and the recommendations that can be provided to ARB Ltd are explained in the statements that have been given as follows:

• The firms need to construct a plan and a policy in order to enhance the optimisation of the principle of wealth with regards to the businesses.
• The firm has to implement the debt capital mix in their capital framework in order to have a mix of the capital structure that would be favourable and balanced.

Hence, it is pertinent that ARB Ltd has to enhance their capital framework by bringing in debt capital and thereafter gaining a balance that would be helpful in mitigating the risks that are related to the capital in an effective manner. ARB Ltd even has to optimise their shareholder’s wealth and they are the ones associated with their business activities.    

Reference List 

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