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A description of the important factors, in addition to quantitative factors, that were considered when making this capital budgeting decision.
In 2018 Google revenue amounted to $39.2 billion. If the decision to implement a new computer network system that cost the company 10% of last year’s profits would equate to a cost of $3.9 billion. Therefore, the factors that would need to be considered in the decision-making process would be; will the new computer network system, improve the current processes of the company, increase the profits of the company and satisfy the goals of the stakeholders, and can it be implemented in a timely manner that would cause little disruption to current operations and stay within the budget set.
An explanation of how these factors are significant to the company.
According to Byrd, Hickman & McPherson (2013), “the trade-off theory argues that companies have an optimal level of debt (a mix of debt and equity that maximizes value)” (p. 270). These factors are significant to the company because a company must decide the value of money spent on projects and whether they will yield a profit or loss.
A summary of how you will determine the criteria to rank capital budgeting decisions and whether some criteria are more important than others.
Determining the business’s target capital structure is essential in the decision-making process. According to Byrd, Hickman & McPherson (2013), “the company’s debt capacity, or maximum amount of debt that can be safely serviced” (p.270). The criteria used to rank capital budgeting in this decision would be the cost, the availability of the funds, and the risk involved. These methods will be used to evaluate how valuable and beneficial the new computer system will be to the company. In my opinion one is not more important than the other as all are needed to make an inform decision on whether the investment is going to be beneficial to the company.
A calculation of the proposed return on investment based on criteria you select and justification for that ROI
The return of investment (ROI) is a method used to measure the expected return to determine the efficiency of an investment compared to other investments (Ichsani & Suhardi, 2015). The formula for determining ROI is as follows:
Current value of Investment – Cost of Investment
Cost of investment
In 2019 the company made $40.9 billion in profits. Therefore, using the profits made in 2018 and 2019 the $3.9 billion investment would yield a ROI of 43.6% increase in profits making the investment for a new computer decision a positive in that it increased profits.
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.)
Ichsani, S., & Suhardi, A. R. (2015). The Effect of Return on Equity (ROE) and Return on Investment (ROI) on Trading Volume. Procedia – Social and Behavioral Sciences, 211, 896–902. https://doi-org.proxy-library.ashford.edu/10.1016/j.sbspro.2015.11.118
The most current profit figures for the Walt Disney Company generated total revenue of 69.57 billion U.S. dollars, up from 59.43 billion in 2018. If 10 percent of this income is spent on new equipment, the expense would be $6.957 billion. The main reason for the capital budgeting is to increase a company’s profit through investment in capital. Factors to consider when making a decision on this investment include funding availability, working capital, capital structure, taxation, government policy, and project need. The most important factor to consider in this instance is project need. Walt Disney does not work in a retail environment where a client places an online order and expects delivery within a few days. The main customer of Walt Disney is on-site people, especially children. Walt Disney’s products and services include 11 theme parks (including Walt Disney World and Walt Disney Land)… Their business has a wide array of products to choose from when buying them. Walt Disney has won to provide multidivisional (M-form) goods and cooperative organizational structure that focuses on type of business. For diversified companies a multidivisional or M-form organizational structure is popular. Disney explicitly uses the cooperative M-form corporate structure in this case of an overview of the organization. Disney ranks No. 1 among Forbes ‘ 2018 Global 2000 firms, receiving the highest marks. When rating capital investment goods, it would make more sense for Disney to invest $6 billion in new technologies improving the manufacturing process, or in independent research and development of new products and services that can expand its customer base beyond the 11 theme parks.
There are typically four ways of estimating ROIs used when analyzing capital investment ventures. These are the payback process, net present value, and domestic rate of return and index of profitability (Knight, 2015). There is a growing movement in Walt Disney. Traditional methods of measuring ROI, and instead calculate value. Utility is a term that “allows businesses to assess the value of important projects but that do not necessarily improve the bottom line”. By using value to test the proposed, the measurable would include risk mitigation, market pace, strategic fit and new business ventures that would be developed. Use utility versus traditional ROI approaches in assessing this proposed project might make Walt Disney a viable investment.