SLU111 Business Capital Investments Discussion

SLU111 Business Capital Investments Discussion

Instructions:

SLU111 Business Capital Investments Discussion

Part (1)

Some types of capital investments have associated cash flows that are very difficult to estimate, while other types of capital investments have associated cash flows that are very easy to estimate. Name two capital investments from your chosen publicly traded entity, one that has associated cash flows that are easy to estimate and one that has associated cash flows that are difficult to estimate. Explain how these two types of investments differ and why the associated cash flows are easier or more difficult to estimate.

(Part 2a) 

Making judgments about capital investments is one of the most prominent issues managers encounter, according to William J (2020).

The phrase “capital investment” usually refers to money spent on acquiring plant assets, creating new product lines, or acquiring subsidiary businesses.

Once the money has been committed, such decisions are challenging, if not impossible, to reverse. They commit financial resources for extended periods. Therefore, businesses stand to gain (or lose) for many years from wise capital investments.

Capital budgeting is the process of analyzing and ranking potential capital investment possibilities. Estimates of a future operating performance play a significant role in capital budgeting. These estimations frequently have a high level of uncertainty; thus, managers should analyze them carefully. Numerous non-financial considerations are also considered (William, J, 2020, p. 1126).

There is no set budget for capital investment.

While large-scale projects in capital-intensive industries like mining, utilities, and infrastructure may cost hundreds of millions, a startup may only need less than $100,000 in initial money.

A company’s decision to invest is part of a long-term growth plan. A business plans and conducts capital expenditures to assure future growth.

Increasing operating capacity, market share, and generating more revenue are specific goals of capital investments.

For the same goals, the company may invest money in the form of stock ownership in the complementary business operations of another business. (What Is Capital Investment? n.d.)

Microsoft is often recognized as a highly profitable company.

Microsoft Corporation develops and maintains the software, services, hardware, and other products.

Its three business categories are productivity and corporate processes, more innovative clouds, and personal PCs.

The Productivity and Business Processes segment includes the company’s portfolio of productivity, communication, information services, and related devices and platforms.

The “Intelligent Cloud” segment refers to the company’s public, private, and hybrid cloud technologies and services that may be used to power modern enterprises.

More Personal Computing includes products and services for end-users, programmers, and IT professionals across all platforms. OS systems, server applications, business solution apps, server apps, desktop and server administration tools, software development tools, video games, personal computers, tablets, gaming and entertainment consoles, other intelligent devices, and matching accessories are also sold by the company.

The company is committed to pursuing its goals in Research & Development, which currently include reimagining productivity and business processes, constructing an intelligent cloud platform, and developing more personal computing technology.

The information on a company’s statement of cash flows might provide insight into the company’s cash expenditures. The cash outflows and cash inflows of a business are depicted on its statement of cash flows (cash inflows). In its cash flow statement, a business will indicate how much money it receives from its ongoing operations and outside investments and how much it spends on business activities and assets over a particular quarter. These comprise cash flows from operating as well as investing and financing activities.

In this case, Microsoft’s cash flow is derived from operating activities, which are easy to estimate; the amount of money the company generates via its continuous, routine business activities, such as manufacturing and selling products or providing consumer services. (Definition of Cash Flow from Operating Activities (CFO), n.d.) On the other hand, technology is more challenging to estimate due to its ongoing evolution. Therefore, the company could underestimate or overestimate, which can be detrimental to the company’s success.

This is where Capital budgeting comes into place. Businesses implement internal controls for the capital budgeting procedure to prevent unduly optimistic or pessimistic estimations and aggregation errors. Numerous businesses employ routing forms requiring all senior-level managers to sign off on significant capital budgeting projects. The knowledge of the financial department is utilized to analyze and execute evaluations about the correctness of estimates. Typically, the board of directors must approve the most significant strategic capital investments (William, J, 2020, p. 1135).

References:

10 most profitable companies in the world. (n.d.). Investopedia. Retrieved June 26, 2022, from https://www.investopedia.com/the-world-s-10-most-profitable-companies-4694526

Cash flow from operating activities (CFO) definition. (n.d.). Investopedia. Retrieved June 28, 2022, from https://www.investopedia.com/terms/c/cash-flow-from-operating-activities.asp

Microsoft Corp. (Nasdaq: MSFT)| revenues. (n.d.). Stock Analysis on Net. Retrieved June 28, 2022, from https://www.stock-analysis-on.net/NASDAQ/Company/Microsoft-Corp/Analysis/Revenues

What is Capital investment? (n.d.). Investopedia. Retrieved June 26, 2022, from https://www.investopedia.com/terms/c/capital-investment.asp

Williams, J. (2020). Financial & Managerial Accounting (19th Edition). McGraw-Hill Higher Education (US). https://reader2.yuzu.com/books/9781260706178

Part (2b) This is a discussion response so please let’s add to the discussion. 

The most commonly used methods for capital budgeting are the payback period, the net present value, and an internal rate of return evaluation.

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