Capital budgeting decisions made too early Essay Example for Free

Capital budgeting decisions made too early EssayHughes Corporation employs a machine to manufacture its output. It has identified a replacement but wishes to carefully consider the exit on various aspects of the business if it continues to use the lively machine compared with the effect if it replaces it with the new machine. The importance of Capital Budgeting cannot be underemphasized as a replacement decision can impact Hughes Corporation for many years, and so it must(prenominal) be carefully planned.A bad decision can have a significant effect on the firms future operations. The timing of the decision is important as capital budgeting projects whitethorn take years to implement. Firms should plan accordingly, failing which they may find that the capital budgeting decision is timed too late, and prove to be costly with respect to competition.Capital budgeting decisions made too early can besides cause problems because generally capital budgeting projects are large inves tments, thus early decisions may generate excess costs for the firm. Hughes Corporation would like to assess whether it should replace the machine now with the new one or defer the decision.Requirement 2The idea for a capital budgeting project, whether generated by customers, employees, suppliers, should be based on the requirements and experiences of the corporation, and of these groups. For example, a sales phonation might often receive customer feedback that there is a contract for the product to have particular characteristics that the firms be product does not have. The sales representative may present this idea to management, who subsequently evaluates its viability by consulting with production personnel, engineers, and by carrying out a feasibility study.Once the idea is proven to be viable the financial manager conducts a capital budgeting depth psychology to ensure it will be beneficial to the firm with respect to its hold dear.The corporation is satisfied with the o utput from its existing machine. However, its efficiency is comparatively less than a new machine and the operating and maintenance costs of the existing machine are also higher. Research conducted on internet sources revealed an condition published in the engineer Review (September 22, 1999) which explained the rationale behind the decision on replacing an addition.As pointed out in the article by Hartman, traditionally, a replacement analysis is undertaken, taking into account an optimal replacement schedule and building-in minimisation of purchase, maintenance, operating costs and salvage lever, over some time horizon. These costs are based on the asset utilization over its useful life (Hartman 1999).Requirement 3In the case of this corporation, to baffle the value of an asset, we should compute the present value of cash flows that the asset is expected to generate over its useful life. When the value of the asset is determined, we can determine if we should invest in the as set by comparing its computed value to the purchase cost of the asset. If this decision-making procedure is followed it will help ensure the firm will maximize its valuethat is, if an asset has a value to the firm that is greater than its cost, the firms value would be change magnitude if the firm purchases the asset (Besley 2007).Requirement 4Besley continues to explain the techniques employed in assisting a decision to be reached by aggregating the cash-flows resulting from buying a replacement asset. However, as the cash-flows span over several years (over the assets useful life) the cash-flows should be discounted to arrive at their net present value.