Risk Manage Capital Investment Decisions: A Lease vs. Purchase Illustration

This paper demonstrates how to build risk into capital investment decisions.  We illustrate how to combine distribution theory, technology, and a business professional’s skills and insight into a capital investment analysis.  In addition, we show how management can approximate the risk of each cash flow estimate and display the overall capital investment results.  This framework is extended by showing how a mutually exclusive decision can be improved, using a lease versus purchase example.<a style="mso-footnote-id: ftn1;" name="_ftnref1" href="http://journals.cluteonline.com/index.php/JABR/author/saveSubmit/#_ftn1">[1]</a>  An Excel template is readily available from the authors allowing a hands-on application of the framework presented in this paper.  In addition, this paper positions the reader to comfortably use more advanced analytics, such as Monte Carlo simulation, a tool that is readily available in commercial software applications.<div style="mso-element: footnote-list;"> <hr size="1" /><div id="ftn1" style="mso-element: footnote;">This paper focuses on the application of net present value.  The advantage of using net present value in a capital budgeting decision is that it shows the potential stakeholder wealth creation and wealth destruction.  An internal rate of return analysis is intentionally left out of this paper.  According to Brealey, Myers and Allen, Principles of Corporate Finance, New York, NY: McGraw-Hill/Irwin 2006, pp. 91-99, internal rate of return should not be used to evaluate mutually exclusive capital investments.  </div></div>

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The Use Of Capital Budgeting Techniques In Businesses: A Perspective From The Western Cape

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v25i4.1015 ◽

2011 ◽

Vol 25 (4) ◽

Cited By ~ 3

Author(s):

Pradeep Brijlal ◽

Lemay Quesada

Keyword(s):

Net Present Value ◽

Capital Budgeting ◽

Payback Period ◽

Bank Loan ◽

Rate Of Return ◽

Western Cape ◽

Internal Rate Of Return ◽

Font Size ◽

Present Value ◽

Internal Rate

Capital budgeting is one of the most important areas of financial management. There are several techniques commonly used to evaluate capital budgeting projects namely the payback period, accounting rate of return, present value and internal rate of return and profitability index. Recent studies highlight that financial managers worldwide favor methods such as the internal rate of return (IRR) or non-discounted payback period (PP) models over the net present value (NPV), which is the model academics consider superior. In particular this research focused on small, medium and large businesses and investigated a number of variables and associations relating to capital budgeting practices in businesses in the Western Cape province of South Africa. The results revealed that payback period, followed by net present value, appears to be the most used method across the different sizes and sectors of business. It was also found that 64% of businesses surveyed used only one technique, while 32% of the respondents used between two to three different types of techniques to evaluate capital budgeting decisions. The findings show that the more complicated methods such as IRR and NPV are most favored by the large businesses as compared to the small businesses. The majority of the respondents believed that project definition was the most important stage in the capital budgeting process. Implementation stage appeared to be the most difficult stage for the manufacturing sector whereas Project definition, Analysis and selection and Implementation were generally rated as being the difficult stages by the retail sector. Project definition and Analysis and selection were found to be the most difficult stages by the service sector. Most businesses used the cost of bank loan as a basis in capital budgeting and more than two thirds of respondents used non-quantitative techniques to consider risk when making a decision on investing in fixed assets.

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Evaluation of Investment Projects: A Case from Turkish Cement Sector

International Conference on Eurasian Economies 2016 ◽

10.36880/c07.01587 ◽

2016 ◽

Author(s):

Miyase Karabulut ◽

Sıtkı Sönmezer ◽

Vedat Zeki Yenen ◽

Zeynep Emir

Keyword(s):

Qualitative Research ◽

Net Present Value ◽

Capital Budgeting ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Investment Projects ◽

Preliminary Results ◽

Internal Rate ◽

Exclusive Or

Capital budgeting is crucial for firms that have projects to evaluate especially when the projects are mutually exclusive or financing is scarce. The aim of the study is to determining the most widely used methodologies in capital budgeting decisions and their effectiveness. A qualitative research will provide cement sector specific examples in assessing industry projects and compares the methods of Net Present Value, İnternal rate of Return, Pay-back period, discounted pay-back period and MIRR. Each method is briefly discussed and its drawbacks and advantages are mentioned in detail. Other sectors are also examined in terms of capital budgeting. Our preliminary results indicate that net present value method dominates capital budgeting decisions in the sectors under study.

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Reinvestment Bias When Analyzing Mutually Exclusive Assets

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v2i3.6572 ◽

2011 ◽

Vol 2 (3) ◽

pp. 71

Author(s):

Robert J. Sweeney

Keyword(s):

Net Present Value ◽

Capital Budgeting ◽

Cash Flows ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate ◽

Current Period ◽

The Cost ◽

Flows Over Time

Capital budgeting decisions generally involve the commitment of resources in the current period to secure positive cash flows over time that generate a rate of return in excess of the cost of the funds invested. The most common techniques used to perform this analysis are the Net Present Value (NPV) and the Internal Rate of Return (IRR).Conceptually, these two techniques are substitutable; i.e. the resulting decision from a NPV analysis is identical to the decision from an IRR analysis. In practice, however, the NPV and the IRR can, on occasion, produce conflicting decisions. Specifically, when analyzing mutually exclusive assets the Net Present Value can support one asset while the Internal Rate of Return supports the other. The purpose of this paper is twofold; first, to highlight structural deficiencies in the conventional application of the NPV and the IRR, and second, to demonstrate a procedure to correct for these structural errors.

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Analisis Kelayakan Pengembangan Usaha Pasta Kangen Jupiter dan Mogot Jakarta Barat dengan Menggunakan Metode Capital Budgeting Tahun 2019-2023

Reviu Akuntansi, Manajemen, dan Bisnis ◽

10.35912/rambis.v1i1.401 ◽

2021 ◽

Vol 1 (1) ◽

pp. 9-14

Author(s):

Ni Puthu Eka Wardani Haliasih ◽

◽

Pambuko Naryoto ◽

Keyword(s):

Research Methodology ◽

Net Present Value ◽

Average Rate ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate

Abstract Purpose: This study aimed to determine the feasibility of establishing the Pasta Kangen Jupiter dan Mogot Jakarta Barat in West Jakarta. Research methodology: The assessment is reviewed with Capital Budgeting in Optimistic, Moderate, and Pessimistic versions. Several methods include Payback Period, Net Present Value, Profitability Index, Average Rate of Return, Internal Rate of Return, dan Discounted Payback Period. Results: Based on the results of calculations using the Optimistic and Moderate Version of Capital Budgeting method, Pasta Kangen Jupiter Daan Mogot Jakarta Barat business in West Jakarta is feasible to run, while the Pessimistic Version is not feasible to run.

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Analisa Kelayakan Capital Budgeting Jaringan Backbone Kabel Serat Optik Palapa Ring Studi Kasus : Palapa Ring Barat

Jurnal Telekomunikasi dan Komputer ◽

10.22441/incomtech.v9i2.6472 ◽

2019 ◽

Vol 9 (2) ◽

pp. 87

Author(s):

Nurwan Reza Fachrurrozi

Keyword(s):

Net Present Value ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate

Dalam rangka masyarakat Indonesia yang modern dan berbasis informasi, pemerintah bekerjasama dengan beberapa perusahaan telekomunikasi swasta menggelar mega-proyek pembangunan jaringan infrastruktur telekomunikasi berupa jaringan backbone kabel serat optik berkecepatan tinggi yang dinamakan Palapa Ring. Tujuan Palapa Ring antara lain untuk mengurangi kesenjangan digital antara Indonesia Bagian Barat & Indonesia Bagian Timur serta menyediakan akses telekomunikasi bagi masyarakat dengan tujuan pemerataan akses informasi untuk meningkatkan kesejahteraan dan mengurangi kemiskinan. Dalam perancangan jaringan ekstensi, parameter diatas ditambah lagi dengan proyeksi kapasitas jaringan yang dibutuhkan untuk beberapa tahun kedepan. Landing Stations ini terdiri dari 12 Kota Pantai beserta analisa penempatannya yang tidak semuanya sama dengan rekomendasi KMI. Untuk proyeksi kebutuhan kapasitas, didapatkan angka kebutuhan kapasitas untuk masing-masing Landing Stations sampai tahun 2033. Penelitian ini bertujuan untuk menganalisa kelayakan dari rencana investasi yang akan dilaksanakan PT. XXX. Rencana investasi ini berupa pembangunan proyek Palapa Ring Barat dengan total investasi sebesar Rp. 1,000,000,000,000 dengan tingkat bunga sebesar 18% & 30%. Dengan alat analisis Payback Period, Discounted Payback Period, Net Present Value, dan Internal Rate Of Return. Tiga alat analisis tersebut dipakai juga oleh PT. XXX untuk mengukur layak atau tidaknya proyek tersebut. Dari hasil analisis dan rencana proyek Palapa Ring Barat diperoleh Payback Period (PP) 3 tahun 1 bulan dan Discounted Payback Period 4 tahun 5 bulan dari target PT. XXX yaitu 15 tahun, Net Present Value (NPV) Rp. 1,392,644,795,000 dari target yang di tentukan PT. XXX yang hasilnya positif, Internal Rate Of Return (IRR) 35 % dari 18 % & 30 % yang di targetkan oleh PT. XXX. Dan juga didapatkan hasil Subsidi KPBU dari pemerintah Rp. 1,490,772,000,000 dengan rincian simulasi pembayaran selama 15 Tahun dengan Interest 0 % sebesar Rp. 99,384,800,000 / Tahun.

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Cost and Benefit Analysis of One Tambon One Product: A Case study of Rattan and Bamboo Wickerwork Products Group of Bantungfak, Thailand

Journal of Business and Economics ◽

10.15341/jbe(2155-7950)/07.10.2019/006 ◽

2019 ◽

Vol 10 (7) ◽

pp. 654-657

Author(s):

Pathompong Kookkaew ◽

Keyword(s):

Capital Investment ◽

Net Present Value ◽

Investment Decision ◽

Rate Of Return ◽

Cost Ratio ◽

Internal Rate Of Return ◽

Present Value ◽

Financial Return ◽

Internal Rate ◽

Cost And Benefit Analysis

The purposes of this research study were cost and benefits analysis of Rattan and Bamboo Wickerwork Products Group. Qualitative study was employed to collect and analyze data using in-depth interview. Interview questions were related to costs and benefit, and return on investment analysis — Net Present Value: NPV, Internal Rate of Return: IRR, Benefit and Cost Ratio: B/C Ratio at Discount Rate of 7% of 10 years of project life. The results reveal that Net Present Value (NPV) was 137,391 Baht, Internal Rate of Return (IRR) was 30.89%, Benefit and Cost Ratio (B/C Ratio) was 1.04. Financial return is in capital investment decision criteria.

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ANALISIS CAPITAL BUDGETING TERHADAP KELAYAKAN INVESTASI AKTIVA TETAP PADA PT. KHARISMA ARTA ABADI GUNA LUWUK KABUPATEN BANGGAI

Jurnal Ilmiah Manajemen E M O R ◽

10.32529/emor.v2i1.190 ◽

2019 ◽

Vol 2 (1) ◽

pp. 70

Author(s):

Irwan Moridu ◽

Sitti Damayanti Adista

Keyword(s):

Net Present Value ◽

Average Rate ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate

Tujuan yang ingin dicapai dengan diadakannya penelitian ini adalah untuk menganalisis kelayakan rencana investasi asset tetap yang berupa penggantian mesin baru pada PT. Kharisma abadi arta guna luwuk. Adapun teknik yang digunakan dalam penelitian ini adalah deskriptif sedangkan pendekatan yang digunakan adalan kuantitatif, analisis data menggunakan laporan arus kas untuk menghitung Payback Period,Average Rate Of Return,Net Present Value, Profitability index,Internal Rate Of Return. Dari hasil analisis data diperoleh hasil bahwa untuk PP 1 tahun 9 bulan sehingga proyek di terima, untuk ARR dieroleh nilai 51,84%>25% maka proyek investasi diterima,untuk NPV diperoleh nilai positif Rp. 3.825.223.229 maka proyek diterima, dan untuk PI diperoleh nilai 3,5>1 maka investasi layak dilaksanakan. Dari penelitian yang telah dilakukan untuk mengantisipasi kerugian-kerugian yang tidak diharapkan oleh pihak PT. Kharisma Abadi Arta Guna harus melakukan analisis kelayakan investasi sebelum melakukan investasi , agar dapat mengurangi resiko yang terjadi.

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PERENCANAAN PENGHEMATAN ENERGI DENGAN SISTEM KOGENERASI / COMBINE HEAT AND POWER (CHP) CAPSTONE MICROTURBINE C-30 DI PT DUA KELINCI

Simetris Jurnal Teknik Mesin Elektro dan Ilmu Komputer ◽

10.24176/simet.v7i2.760 ◽

2016 ◽

Vol 7 (2) ◽

pp. 495

Author(s):

Imam Abdul Rozaq ◽

Noor Yulita Dwi Setyaningsih

Keyword(s):

Net Present Value ◽

Capital Budgeting ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate ◽

C 30

PT Dua Kelinci adalah salah satu industri makanan yang terbesar di Pati yang memiliki daya listrik sebesar 4950 kVA. PT Dua Kelinci perlu melakukan penghematan energi, salah satunya dengan kogenerasi (penggabungan antara listrik dan panas). Penelitian ini dimulai dari pengambilan data berupa kebutuhan listrik dan panas pada proses pembuatan kacang telur menggunakan teknologi kogenerasi Capstone Microturbine C-30 di PT Dua Kelinci. Metode penelitian yang digunakan meliputi analisis teknis dan analisis lingkungan Dari hasil analisis dihasilkan bahwa asumsi pada kondisi awal harus membayar biaya listrik dan panas sebesar Rp 959.784.664,00 sedangkan dengan menggunakan kogenerasi hanya membayar Rp 774.499.669,00 pertahun. Jadi penghematan total sebesar Rp 185.284.995,00 per tahun. Kelebihan penjualan listrik sebesar 103.680 kW (Rp 101.088.000,00), kelebihan penjualan panas sebesar 4,075 TJ/tahun (Rp 255.085.220,00), dan perdagangan emisi gas rumah kaca sebesar 130,88 tonCO2 (Rp 10.470.800,00) yang dapat diasumsikan seperti menanam pohon sebanyak 29 hektar pepohonan. Setelah dilakukan perhitungan Analisis Capital Budgeting diperoleh NPV (Net Present Value) sebesar Rp 107.058.448,00 dan IRR (Internal Rate of Return) sebesar 12,75 % serta PBP (Pay Back Periode) 5,18 tahun sehingga proyek penerapan sistem kogenerasi dengan menggunakan Capstone Microturbine C-30 layak diterima karena nilai NPV lebih besar dari nol dan nilai IRR lebih besar dari tingkat suku bunga bank serta PBP yang dihasilkan sebesar 5,18 tahun. Kata kunci: energi, kogenerasi, capstone microturbine.

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Aplikasi Capital Budgeting dalam Penentuan Keputusan Investasi Kamar dan Ballroom Di Hotel Panorama Lembang

Jurnal Kepariwisataan: Destinasi, Hospitalitas dan Perjalanan ◽

10.34013/jk.v2i1.17 ◽

2018 ◽

Vol 2 (1) ◽

pp. 10-20

Author(s):

Wishnu Wardhana

Keyword(s):

Time Series ◽

Positive Result ◽

Net Present Value ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate ◽

Forecasting Methods

This research's title is "Applications of Capital Budgeting Method in Feasibility Study of Rooms and Ballroom Investment at Hotel Panorama Lembang", the purpose of this research are to know the feasibility of hotel investment based on financial projection aspect which using Capital Budgeting Method at Hotel Panorama Lembang. The feasibility of investment evaluate by the tools of capital budgeting model, which is have aspect of Discounted Payback Period, Net Present Value, Internal Rate Of Return, and Profitability Index in Hotel Panorama Lembang. The results of this research from the financial projection evaluated with the tools of capital budgeting evaluation which have the results can be seen that investment is feasible, as calculated by the method of discounted payback period is 8 years and 2 months based on hotel evaluation and 6 years and 11 months based on writer's evaluation, net present value in positive result (NPV > 0) in the amount of Rp. 1.743.693.325 , Internal Rate of Return is higher than the discounted factor of 12% in the amount of 23.9303%, profitability index is in positive result higher than 1. Based upon this calculation summarised that the feasibilty of investment based on financial projection are accepted. Based on the evaluation from the capital budgeting method, the criteria of investment at Hotel Panorama Lembang are accepted. The management used the methods which doesn't improve a good result in feasibility. Methods that used by the author more improve a good result in investing decisions, because using a selection of forecasting methods for future revenues. The author used a time series forecasting methods to improve more revenues for hotel. This forecasting method can provide the closest forecast result and the highest rate of accuracy. The author recommends to the management of Panorama Hotel Lembang to continue and accepted the investment of new rooms and ballroom. Considering the result of a feasebility study with a capital budgeting methods are accepted. The author also recommends to the management of Panorama Hotel Lembang to use a proper forecasting methods, such as time series methods.

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The Extent of Using Capital Budgeting Techniques in Evaluating Manager’s Investments Projects Decisions (A Case Study on Jordanian Industrial Companies)

International Journal of Economics and Finance ◽

10.5539/ijef.v9n12p175 ◽

2017 ◽

Vol 9 (12) ◽

pp. 175

Author(s):

Osama Samih Shaban ◽

Ziad Al-Zubi ◽

Ahmad Adel Abdallah

Keyword(s):

Net Present Value ◽

Research Study ◽

Capital Budgeting ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Investment Projects ◽

Internal Rate ◽

Industrial Companies ◽

Accounting Rate

The aim of this research paper is to study the extent of using capital budgeting techniques on choosing the suitable project for investment. The current research study focused on capital budgeting techniques such as Net Present Value NPV, and Internal Rate of Return IRR, and Pay Back period PB, which is considered the main tools in the hands of decision makers in deciding the best possible alternative of investment. In order to achieve the purposes of the study a questionnaire have been created (based on Graham and Harvey survey in 2001), the aim was to cover most of the Jordanian industrial companies despite of their size and ownership in the current year 2017. Resolution data were analyzed using the statistical program SSPS. Finally, the study concluded that, 58% of Jordanian industrial companies use the Net Present Value, 22% use the Payback Period, 12% use the Internal Rate of Return, and the remaining used a combination of the Accounting Rate of Return, Profitability Index, and sensitivity analysis. The current research study is expected to assess management in choosing the best capital budgeting technique in the evaluation of its future investment projects.

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