This section of the paper analyzes the current literature in few areas of a business that have an effect on the appraisal decisions on investment. The project economic analysis is based on the various aspects case projects that can be influential in the preparation of a financial report. The literature review is established on the basis of one specific topic that has an influence on the appraisal decisions regarding investment (Kashyap 2014). One of the most significant factors that has an impression on the decisions regarding investment and on the preparation of the financial report is the process of capital and its budgeting process. Therefore, the review of the economic analysis will be constructed on this topic as this topic is the best practiced technique that could be discovered from the analysis of the project.
The construction of a Capital Budgeting process is the one of the utmost significant decisions regarding policy that an organization undertakes. It is seen that an organization does not wish to finance in any long-term schemes related to investment and does not wish to maximize the interests of the stakeholders especially with the wealth of the shareholders. The most favorable decisions in the process of capital budgeting is to maximize the major objectives of the organization. These include optimizing the wealth of the shareholders and aid the companies to stay viable as the company expands and grows (Burns & Walker 2015). These decisions are few integral sections of the whole corporate governance and corporate financial management. A firm expands when they invest in capital assets like in machinery and plants to create future profits that are more than the initial costs.
Mukherjee et al.,(2013) reveals that decisions with respect to capital budgeting are significant owing to their long-term monetary impact to the firm, and therefore they are key. The effect of capital budgeting is applicable even in the future and the company carries on for a lengthier time period than the effects on the operational expenses. Mbabazize, & Daniel (2014) explains capital budgeting as the method of choosing the capital investments. Roy et al.,(2017) on the other hand explains capital budgeting has the differential features of conversation of funds for the assistance for the future, venture in long-run operations and the effect of future opportunities over a number of years.
This paper makes use of the process of capital budgeting together with appraisal regarding investment and process of decision making regarding investment. Therefore, capital budgeting in a shorter form can be defined as the decisions undertaken by a firm to assign the capital resources in the most effective manner in the long-term operations with an expectation that the average benefits of the future increases from the primary investment so as to increase the interest and the wealth of the shareholders (Rossi 2014).
The decision of the firm to invest in assets that are long-term has an effect on the direction and the degree of development. An inappropriate decision can be catastrophic for the existence of the industry in the long-run. Andor et al.,(2015) explains that purchase of unimportant capital assets lead to unnecessary allocation of capital and increase in the operating costs of the firm.
The capital investment returns can be computed with respect to the surplus inflow of net cash and the maximization of the price of share. The cash flows are significant liquefied resources for any organization as the additional resources can be purchased and if the inflow of cash increases from the outflow of cash. The share prices that are given on the stock exchanges are near to cash with respect to its liquidity because they can be switched to cash with ease of the firm is registered in the stock exchange. Feasible level of capital reserves provide an income more than its budget to raise the total worth of the organization that means that the investment should generate a positive Net Present Value or the Net Present Value needs to be over zero to enhance to the value of the company (Chittenden & Derregia 2015).
The process of Corporate Financial Management involves the process of financing, investing, decisions regarding dividend and working capital. It is seen that capital budgeting is a vital part of the Corporate Financial Management. The process needs concurrent considerations with respect to the decisions discussed above. It involves planning for the organization to accomplish their objectives. It is seen that decisions varies in various departments as they are decentralized and they should be well constructed to accomplish the objectives of the company (Bierman Jr & Smidt 2014). An effective financial management is inclusive of the following factors:
Investment Decisions: It involves assigning the capital reserve to different schemes having the utmost Net Present Value.
Financing Decisions: The capital sourcing involves choosing from the most reasonable source first and then to the last
Working Capital: The management of working capital is essential for undertaking the operations of the business to meet the obligations of the firm. Working capital is computed deducting the current assets from the current liabilities thereby revealing the organization’s capability to met their short term liabilities when they are due.
Dividend Decisions: Malenko (2016) suggests that dividend requires to be paid to the shareholders only when the obtainable investments having a positive Net Present Value are financed fully as it is known that the cheapest capital source is the internal source that is followed by debt and equity. In practice, Mendes-Da-Silva & Saito (2014) reveals that the decisions to pay out dividends are established with the help of the dividend policy of the concerned firm to maintain their current shareholders and motivate new shareholders in the business.
It is known that there are various techniques that are used for capital budgeting by the financial managers. The methods of capital budgeting are categorized in two sections namely the Discounted Cash Flow Model (DCF) and the Non-Discounted Cash Flow Model (NDCF). DCF discounts the estimated Net Future Cash Flows by making use of the discount rate that are risk-adjusted to discover the present value by considering the Time Value of money. This process involves Net Present Value, Internal Rate of return and the Index of Profitability. The NDCF method does not price cut the net future cash flow and therefore, does not make use of the Time Value of Money and rejects the project, business risks and the financial factors (Goel 2015). This process makes use of Payback Period and the Accounting Rate of Return.
The Discounted Cash Flow method and the Non-Discounted Cash Flow method are both important for a firm as they forecast the future trend of the business activities and even advise the firms about the effective budgeting of the capital that will enhance the business activities of the company. Therefore, it can be said that capital budgeting is a significant part for constructing a financial report that will develop will help an organization to expand their business.
The construction of the literature review is influential for the preparation of a research methodology that will aid in the development of an effective financial report. The methodology is prepared by primarily writing an introduction of the research topic that will generate the reason for the preparation of the methodology. After the introduction, an outline of the method is prepared where the process that will be undertaken to complete the methodology is explained in a summary. The research onion is prepared that consists of three layers that will be undertaken in the method and covers the various methods. The research philosophy underlines the style the research will undertake in order to obtain the final result. The style will determine the path and the genre the research will follow.
The research approach is the next step that is useful in recognizing the actions that are necessary for completing the research. The research design is constructed with the prospect of directing the analysis towards obtaining an ideal goal by focusing on the goals for undertaking the research. The main aim of constructing the research methodology is to discover the process of data collection so that accurate data can be gathered in order to find out the most effective results that will enhance the operations of the business. It is essential that the methodology is prepared by maintaining the ethics so that sentiments of the firm and the stakeholders involved remain uplifted. The timeline for the preparation of the methodology is even prepared so that all the time taken for undertaking various activities can be understood. Therefore, it can be said that the preparation of an effective research methodology is fundamental so that the financial report can be prepared accurately.
Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: a survey of Central and Eastern European firms. Emerging Markets Review, 23, 148-172.
Bierman Jr, H., & Smidt, S. (2014). Advanced capital budgeting: Refinements in the economic analysis of investment projects. Routledge.
Burns, R., & Walker, J. (2015). Capital budgeting surveys: the future is now.
Chittenden, F., & Derregia, M. (2015). Uncertainty, irreversibility and the use of ‘rules of thumb’in capital budgeting. The British Accounting Review, 47(3), 225-236.
Goel, S. (2015). Capital Budgeting. Business Expert Press.
Kashyap, A. (2014). Capital Allocating Decisions: Time Value of Money. Asian Journal of Management, 5(1), 106-110.
Malenko, A. (2016). Optimal dynamic capital budgeting.
Mbabazize, P. M., & Daniel, T. (2014). Capital Budgeting Practices In Developing Countries: A Case Of Rwanda. Research journali’s journal of Finance, 2(3).
Mendes-Da-Silva, W., & Saito, R. (2014). Stock exchange listing induces sophistication of capital budgeting. Revista de Administração de Empresas, 54(5), 560-574.
Mukherjee, T. K., Rahahleh, N. M. A., Baker, H. K., & English, P. (2013). Capital budgeting techniques in practice: US survey evidence. Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects, 151-171.
Rossi, M. (2014). Capital budgeting in Europe: confronting theory with practice. International Journal of Managerial and Financial Accounting, 6(4), 341-356.
Roy, D., Rudra, D., & Prasad, P. (2017). Capital Structure and Capital Budgeting: An Empirical and Analytical Study of the Relationship. Research Bulletin, 42(4), 50-60.
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