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Capital budgeting is a resource plan of how a firm invests its shares in order to increase its profits. Therefore, there are influences firms need to consider before any decisions on capital budgeting. PepsiCo implemented a new computer network system to decrease the time between customer order and delivery.

The following are factors that need to be considered when making capital budgeting decision (Kent, 2011): Factors significant to the company. Initially, a manager needs to ensure there is appropriate funding on hand for the firm to start a project by means of savings or short-term loan. Secondly, capital structure is the next factor. An example is if PepsiCo’s capital structure is based on equity or debt?

Another factor is the cost relevant; financial managers must review that PepsiCo would be able to withstand relevant costs short of any difficulties. Economic value assessment is the most significant factor so that the company must choose a profitable investment project (Kent, 2011). The criteria of the initial investment (cost relevant) for a project is $617.8 million; 10% of PepsiCo’s 2012 profits.

The projected profits from this stock is an increase in sales by 5% the initial year, then an increase every year after that by 0.3%. PepsiCo’s expected necessary rate of return was 9%; thus, the calculation of NPV and payback period is by utilizing the formulas. The result would be presented for going with the project or passing it. If so, the basis must be known?

Calculation of the proposed return: Payback Period Year Cash Flow Cumulative Cash Flow 0 -617.8 -617.......1691 Thus, the payback period for the projected period is 3 years due to cash flows becoming positive in year 3.

NPV: (Amounts shown are in millions) NPV = CF1 / (1+r)1 + CF2 / (1+r)2 + CF3 / (1+r)3 – CF0 NPV = $65,819.46 / 1.09 + 66,016 /1.18 + 66,214 / 1.30 - $617.8 NPV = $1.750308 million. NPV is positive and larger than zero so the project would be accepted on the basis of NPV since it is the important method to relate share options.

Return on investment: ROI will be computed to ensure that investment is getting the appropriate return ROI = gain / cost of investment x 100 ROI = $1.750308 / $617.8 x 100 ROI = 0.28% The rate of return on this project is also positive; therefore, it would be accepted by management.

Paper For Above Instructions

Capital budgeting is a critical aspect of financial management, particularly for large corporations like PepsiCo and IBM. It involves the process of planning and managing a firm’s long-term investments. This paper will analyze factors influencing capital budgeting decisions, focusing on both PepsiCo’s and IBM’s practices during their respective investment considerations.

The significance of capital budgeting lies in its impact on a firm's resource allocation. Managers must critically evaluate potential projects, ensuring they align with corporate strategic goals. For instance, PepsiCo's recent investment in a new computer network system, aimed at improving operational efficiency, highlights the need for careful budgeting (Kent, 2011). This decision was based on critical analyses of funding sources, capital structures, and relevant costs associated with the project.

One of the primary considerations in capital budgeting is the availability of funds. Managers debate between utilizing internal savings or resorting to short-term loans. The choice depends significantly on the firm’s current financial health and creditworthiness. For instance, PepsiCo must evaluate whether its funding should derive from retained earnings or debt financing, which can influence its capital structure and overall risk profile (Byrd et al., 2013).

Another important factor in capital budgeting is understanding the project’s economic value. Companies need to prioritize investments that promise competitive returns. For example, the analysis that PepsiCo’s initial investment of $617.8 million constituted 10% of its 2012 profits indicates a significant commitment to growth (Kent, 2011). Additionally, by projecting sales increases, PepsiCo can estimate cash flows, which are crucial for determining the payback period and net present value (NPV).

In capital budgeting calculations, the payback period offers insight into how quickly a firm can recover its investments. The presented calculations illustrate that PepsiCo expects to reach a positive cash flow by the third year. Moreover, computing the NPV provides a further analysis of a project’s profitability. A positive NPV implies the anticipated returns exceed the initial investment, validating the project's financial viability (Kent, 2011).

Return on Investment (ROI) is also a key indicator for assessing project feasibility. In PepsiCo’s case, the calculated ROI of 0.28% indicates that while the investment returns are positive, they may not meet higher investor expectations or industry benchmarks. This essential metric allows management to compare different investment opportunities and make informed decisions (Baker & English, 2011).

On the other hand, IBM’s capital budgeting challenges present a contrasting scenario. While IBM has maintained a consistent dividend policy, it has faced declining profits over the past few years. The decision to consider a new project requires evaluating whether it can sustainably enhance IBM's financial trajectory, especially when capital expenditures may lead to increased debt levels (Annual Financial for International Business Machines Corp., 2015).

Within IBM, debates are likely surrounding prior project performance, particularly regarding significant past losses and failed products. The company has a historical context of navigating economic downturns, making it crucial for management to consider the potential impact of new investments on overall financial stability. Historical performance showcases that IBM faced considerable challenges in the 1990s, prompting shifts in strategic direction toward consulting and logistics post-recession (IBM SEC Filing, 2015).

Moreover, comparative analysis between IBM and PepsiCo reveals procurement approaches firmly rooted in their historical performance. Where PepsiCo’s consistent dividend increases foster investor confidence, IBM's fluctuating performance raises concerns. Therefore, for IBM, capital budgeting must focus on quality investments that can generate sustainable growth rather than mere diversification into new technologies.

Ultimately, successful capital budgeting requires a multivalent approach—considering current market conditions, firm-specific risks, potential returns, and strategic alignment. PepsiCo’s method exemplifies how a data-driven and financially prudent approach leads to sustained growth, whereas IBM must achieve a balance between innovation, risk management, and historical performance considerations in its decision-making processes (Baker & English, 2011; Byrd et al., 2013).

References

• Baker, H., & English, P. (2011). Capital budgeting valuation: Financial analysis for today’s investment projects. Hoboken, NJ: Wiley.
• Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint.
• Annual Financial for International Business Machines Corp. (2015). Retrieved on April 14, 2015.
• IBM SEC Filing. (2015). Retrieved on April 15, 2015.
• Kent, J. (2011). Capital budgeting strategies for financial success. Financial Planning Journal, 15(2), 34-45.
• PepsiCo. (2014). Annual report & financial statements. Retrieved on April 15, 2015.
• Green, T. (2015). 3 Stocks with an enviable history of increasing dividends. Retrieved on April 15, 2015.
• International Business Machines Corporation. (2015). Dividend history and stock performance. Retrieved on April 15, 2015.
• Watson, S. (2014). The implications of capital structure on financial performance. Journal of Business Research, 67(1), 101-110.
• Hill, C. (2012). Corporate finance: Management and growth. London: Financial Times Press.