Capital Budgeting Analysis Research Paper Example | Topics and Well Written Essays - 1000 words

Capital Budgeting Analysis - Research Paper ExampleThis shows that the company has improved on the efficiency of the usage of the assets of the company. This is also depicted by an improving asset turnover over the three year period. In 2003, the company generated $1.25 of revenue for both $1 invested in the assets of the company. Moreover, the company is also maintaining a strong control on its administrative and selling expenses this is depicted by an improving net usefulness margin. This signifies that the company has strong growth prospects in incoming and could pave it way to become the market leader in its line of products. judge 1 Figure 2 Figure 3 Since the company has strong future prospects, the company can use the IPO to its advantage. It will provide Superior Living Inc with the some(prenominal) needed capital money for expansion of its product lines including the takings facility. The going public stance will also boost the awareness of the company products in the market and develop a whole new-sprung(prenominal) batch of potential customers. This can eventu all in ally lead to an increase in the market share of the company. However, formerly Superior Living Inc goes public, she will have to face a number of challenges as well. The company will require fulfilling all the necessary obligations of the Securities and Exchange delegation as well as Sarbanes-Oxley Act which will lead to additional costs. Similarly, the management will come under immense scrutiny and pressure from polar stakeholders which can lead to somewhat questionable practices for boosting earnings. This is because investors look at short term growth instead of the long term stability in the company. Debt is some other election to the company to fulfill the capital requirements for the necessary expansion. the debt option will provide the company with the total control of the business with no scrutiny and pressures from the investors and other stakeholders. Similarly, th e interest on the debt will provide a beneficial shield to the company as it will lower the future tax liabilities. However, the debt financing option will increase the leverage of the company thereby increasing the opportunity of bankruptcy. Superior Living Inc has a moderate debt to total assets and debt to equity ratio. As shown in figure 4, the company finances only 28.3 percent of its total assets through the short term and long term debt. If the company funds the new production facility through debt, the ratio will still stay below 30 percent. Figure 5 depicts the debt to equity position of the company. The company has maintained an superior interest coverage ratio over the three year period. It does not face any chance of interest payment crisis in near future and so, can easily use this option as well. Figure 4 Figure 5 The company has huge growth potential and a chance to explore new markets and product ranges. The new production facility is the need of the time and ther efore must be carried be carefully analyzed and carried forward. The new production facilitys cash flows were analyzed at different hurdle rates. Since the Net Present Value of the project is positive at all three possible hurdle rates, the project must be carried forward. Similarly, the Internal Rate of Return is greater as compared to each hurdle rate therefore the project is acceptable. The project has a simple payback period of 3 years. However, the discounted payback period 4 years at a