Application Of Capital Budgeting Techniques Essay

Question:

Discuss about the Application of Capital Budgeting Techniques.

Answer:

Introduction:

It is clear from the table shown above the net value at present methods have been utilised for determining the future cash flow of the project. The approaches of capital budgeting involve several techniques for the case projection. Payback periods and average rates of return are the methods used for the estimation of project risks.

It is clear from the above table that the net value at present is positive and 191.89% is the profitability index of the project. A positive value of the project is an indication that the project is viable and investments can be undertaken. The profitability index helps in the measurement of the cost benefit ratio. A value of 191.89% explains that the value of the cash flow at present is more than the previous investment amount. Information related to the acceptance and refusal of projects can be created by capital budgeting techniques (Hasan, 2013).

The report helps to understand the capital structure of the APN outdoor group which is mentioned in the Australian Stock Exchange. The discussed report explains the weighted average calculation as well as the major analysis of organisational fiscal ratios.

Analysis of the capital structure of APN group:

The cost of capital of the APN Group can be reduced by the increase in the total proportion of the debt value in the fiscal structure. It is found that the weighted average cost of capital of APO is at 8.32%. In year 2016, an additional amount of $181.8 equity was raised by APN. The annual report clearly states that analysis of the financial year 2016, shows the reduction in the proportion of debt in the capital structure (Brief & Peasnell, 2013). The total equity value has been found to increase considerably from $ 461525 in year 2015 to $ 836465 in year 2016. Value of total debt to total equity was 38.1 in present fiscal year and total debt to total capital was found to be 27.61 (Christensen & Kent, 2016).

The analysis of the liquidity position of the organisations is performed by viewing the figures of the present ratios, cash ratios as well as quick ratios. Cash ratio of APN was found to be 0.38, current ratio as 1.90 and quick ratio as 1.89. Organisational ratio of interest coverage is obtained as 25.96 and 0.23 is found to be the long-term debt to total assets (Andor, Mohanty & Toth, 2015).

It can be clearly stated that the net operational flow of cash in the companies has reduced significantly in the last three fiscal years. The earnings per share of the group was 19% below target. This is believed to be because of strategic activities and in the present year, the value stood at 0.29. A significant decline in earnings per share was noticed from 44.4 in year 2015 to 31.4 in year 2016. Price earnings ratio for year 2017 stood at 16.92.

The APN group has Ooh Media as one of its competitors. The equity capital value increased including the organisational borrowings. This the group has both debt as well as equity in the capital structure. Despite this the dependency on the equity is comparatively more (Gerrans, Faff & Hartnett, 2015).

The APN group has felt a strong flow of cash helping in the funding of the investment activities. However the capitalistic nature of both the organisations is similar (Hise & Strawser, 2013).

Basically the cost of the capital is the rate of the return that is expected by the organisation on the capital. This is for the purpose of earning a substitute investment value with an equivalent amount of the risk. The organisational structure of capital includes the amalgamation of the debts with the equity for the reason of the financing of the assets. T he weighted average cost of the capital is influenced significantly by the fiscal decisions of the company and the changes in the capital structure influences the weighted average cost. It must also be considered that the rise or fall of the weighted cost of the capital is directly proportional.

It is crucial for an organisation to reduce the capital cost in order to increase the market value. An important method for the reduction is the restricting of the capital as well as the cost of the capital as well. The funding will get cheaper as the lost of the capital gets lower. The financial cost can also be reduced by opening the line of credit. Bank loans, bonds and credit card debts include some of the common natures of bank loans.

Conclusion:

It can be understood from the analysis and explanation discussed above that the fiscal structure of the APN group includes both debentures as well as equity. The revenues as well as the earnings before the interest have experienced a trend of an upward nature. This has also been experienced by organisational taxes that assist in the generation of the satisfactory returns to the shareholders. Satisfactory returns have been provided to the shareholders and also in the payment of dividends to them.

References:

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.

Brief, R. P., & Peasnell, K. V. (Eds.). (2013). Clean surplus: A link between accounting and finance. Routledge.

Christensen, J., & Kent, P. (2016). The decision to outsource risk management services. Accounting & Finance, 56(4), 985-1015.

Gerrans, P., Faff, R., & Hartnett, N. (2015). Individual financial risk tolerance and the global financial crisis. Accounting & Finance, 55(1), 165-185.

Hasan, M. (2013). Capital budgeting techniques used by small manufacturing companies. Journal of Service Science and Management, 6(01), 38.

Hise, R. T., & Strawser, R. H. (2013). Application of Capital Budgeting Techniques to Marketing Operations. Readings in Managerial Economics: Pergamon International Library of Science, Technology, Engineering and Social Studies, 419.

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