Capital Budgeting Analysis: The Case Study Of Frank Smith

Capital Budgeting Analysisanalyzethe Case Study Frank Smith Plumbing

Analyze the case study, "Frank Smith Plumbing." Analyze the "Frank Smith Plumbing's Case Study" spreadsheet. Compare the cost of the truck to the projected cash flows using capital budgeting techniques. Compile your calculations in the Microsoft® Excel® spreadsheet. Answer the following in the "Recommendations" section of the spreadsheet (in bullet format): Briefly explain why it is inappropriate to call the bank manager and his wife for assistance in getting the loan approved. Briefly explain why limited leverage can be good for business. Based on the results of your analysis, indicate if Stephanie’s father should purchase the truck by borrowing money and why. I need fromtomorrow in the night no more late than 9pm

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Capital Budgeting Analysisanalyzethe Case Study Frank Smith Plumbing

The case study of Frank Smith Plumbing presents a practical scenario for analyzing capital investments through standard techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), payback period, and profitability index. These methods help determine whether purchasing a new truck is financially justifiable based on the projected cash flows and costs involved. To facilitate a thorough evaluation, a detailed comparison of the truck's purchase price against the expected inflows generated by the investment is necessary. The analysis becomes accessible through a spreadsheet where calculations of discounted cash flows, payback periods, and profitability indices are systematically compiled.

In undertaking this capital budgeting analysis, the key steps involve estimating the initial outlay, projecting future cash flows, discounting those flows at an appropriate cost of capital, and interpreting the results. The initial outlay includes the purchase price of the truck, along with any additional costs such as taxes, installation, or training. Future cash flows should encompass increased revenues, reduced operating costs, or other benefits attributable directly to the new truck. Estimations should consider the truck's expected useful life and salvage value at the end of this period. Discounting these cash flows to their present value facilitates an accurate comparison against the initial investment, providing clarity whether the project adds value to the business.

When completing the Excel spreadsheet, it is critical to include detailed calculations for NPV, IRR, payback period, and profitability index. These calculations offer various perspectives on the project's viability, with NPV providing the most comprehensive measure of value addition, and IRR indicating the project's rate of return. The payback period reveals how quickly the initial investment can be recovered, and the profitability index offers a ratio of discounted benefits to costs, helpful in comparing multiple projects.

Recommendations

• It is inappropriate to call the bank manager and his wife for assistance because relying on personal connections does not address the financial viability of the project and may lead to biased or biased-appearing decisions. Such reliance could also undermine the professionalism expected in making prudent capital investment choices.
• Limited leverage can be good for business because it reduces financial risk by minimizing debt obligations. This approach allows the business to maintain greater flexibility, avoid excessive interest costs, and be better positioned to weather economic downturns.

Based on the analysis outcomes, if the projected cash flows from the truck investment yield a positive NPV and an IRR exceeding the company’s cost of capital, it suggests that purchasing the truck is financially sound. If the cash flows are insufficient to recover the initial investment within a reasonable period, or if the project’s IRR falls below the hurdle rate, then it would be inadvisable for Stephanie’s father to borrow money for this purchase. Ultimately, the decision hinges on whether the investment enhances the company's value and aligns with its strategic financial goals.

References

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• Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2018). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.
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