Capital Budgeting and Investment Analysis

Question: Discuss about the Capital Budgeting and Investment Analysis. Answer: Introduction: As per our calculations based above we recommend the company, Equator Ltd to accept plan A. this is so because Plan a offers higher net present value than plan B (Au and Au, 1992). as already mentioned plan a is a highly automated project which involved use of more machinery and use of less physical labour. Though using automated techniques of production has its own advantages, it also carries a lot of disadvantages (Bierman and Smidt, 1975). Therefore, before accepting the plan A based on its high Net present value, the company should also consider the following points: High level of losses in case of machine breakdown- in case there are instances where the machinery breakdown occurs then the company will have to face great losses due to delayed production processes (Capital Budgeting Valuation, 2013). Also, one batch of production produces a large output, so even if one batch of production in case of automated productions is harmed then, the company tends to lose a great share of income. (Chernobai, Rachev and Fabozzi, 2007) Risks of breakdown due to wrong inputs- in case person in charge provide a wrong input by way of material, programme or data in any other form then there are chances of machinery breakdown leading to losses, also, it may lead to wrong production which will be treated as scrap which in turn will result in financial losses for the company. (Danthine and Donaldson, n.d.) Environmental damage- use of automated methods of production are mostly nature harming (Dayanada, 2002). There are new laws and regulations which forbid and lay down penalties for companies which pollute the environment. In case of non compliance of these laws the company may have to face legal actions. (Fabozzi, n.d.) High capital costs- use of highly automated procedures of production involved high capital costs. Also in case of any injury to the assets the company will have to face high costs of repairs. These automated techniques also involve high level of maintainers which tend to be very costly, which in turn will harm the financial position of the company as a whole. (Hitt, Ireland and Hoskisson, n.d.) Therefore, before acceptance of proposal A the company should consider all monetary and non-monetary factors. (Jordan, 2014) Efficient capital market refers to the market structure where the share prices of an entity reflect the latest information. This statement implies that any event or action or information which may affect the financial position of the company (Seitz and Ellison, 1999), be it directly related to it or indirectly, gets incorporated in the share price as soon as the information is received. The intrinsic value of a financial security represents a claim on cash flows of company which are expected to be earned in future. This intrinsic value is the present value of the future cash flows. Therefore, if the future cash flows are affected in any manner by any information, then it should be reflected in the price of the security, this is the whole concept of efficient capital market. (Warren, 2017) Equator Limited in the given case plans to invest ina new line of product which will require huge investments (Shapiro, 2005). If the company decides to raise capital by way of Equity shares then efficient capital markets would be highly productive and beneficial for the company. This can be understood buy the following discussion. The above analysis of the plan of the company represents high returns. If the capital markets are efficient then the investors will also read the same information and would want to invest to invest in the shares of Equator seeing its high expected return and growth. The capital markets being efficient will incorporate the same information in the share price and in turn will help increase the value of the company. (WARREN, 2017) Therefore, the capital market efficiency will help Equator Limited to raise capital since the company has a high growth and return projected. References: Aldridge, A. (2005). The market. 1st ed. Cambridge: Polity. Au, T. and Au, T. (1992). Engineering economics for capital investment analysis. 1st ed. Englewood Cliffs, N.J.: Prentice Hall. Bernstein, P. (2007). Capital ideas evolving. 1st ed. Hoboken, N.J.: John Wiley Sons. Bierman, H. and Smidt, S. (1975). The capital budgeting decision. 1st ed. New York: Macmillan. Capital Budgeting Valuation. (2013). 1st ed. Hoboken, N.J.: Wiley. Chernobai, A., Rachev, S. and Fabozzi, F. 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