Capital Budgeting & Saving

In: Miscellaneous

Submitted By Mfurqan
Words 6030
Pages 25
Goals, Outcome Statements and Budget Estimates of The Federal Government of Pakistan

Compiled by Tariq Husain (thusain@rabt-e-nau.com) for Rabt-e-Nau (www.rabt-e-nau.com) Islamabad Resource Number: GOVERN-R-001 on the Website 31 January 2011

Introduction

In June 2010, the Finance Division of the Government of Pakistan presented an innovative budget document, called the Green Book, or the Federal Medium Term Budget Estimates for Service Delivery 2010-13 (http://finance.gov.pk/budget/mtbf_2010_13.pdf). The purpose, as stated in its Preface, “is to provide Parliament and other stakeholders with the clearest possible statement of the services which are to be delivered and the investments to be undertaken through the application of the funds appropriated by Parliament and, equally importantly, the results which are expected to be achieved in terms of the achievement of goals of public sector activity and the benefits expected to accrue to different population groups from the activities of the Federal Government. The publication of the Green Book marks a major step forward in enhancing the transparency of the federal budget.” The Preface highlights the innovative features of the Green Book in the following words: (a) The Green Book uses the 3-year framework for budgetary planning which lies at the heart of the MTBF reforms. Under this process ministries make their plans and prepare budgetary estimates for a rolling 3-year budgetary horizon. (b) The centerpiece of the Green Book is the breakdown of each ministry or division’s budget by “Outputs”. Outputs represent major lines of service delivery of each ministry. [This makes] it easier for Parliament and other stakeholders to assess whether the public is achieving value for money through the federal budget. (c) [W]hile for accounting purposes, the government budget is divided between the recurrent budget and the…...

Similar Documents

Capital Budgeting

...Capital Budgeting Practices MGMT 640 Section 9040 Professor J.Jain Executive Summary This essay discusses the importance of capital budgeting and analyzes the most common techniques. The most frequently used methods are the net present value (NPV) and internal rate of return (IRR). These are both tools that analyze the present value of the cost of a project as well as the present value of that projects future cash flows. An essential part of these methods is that they both account for discounted cash flow (DCF), meaning that they both reflect the time value of money. When analyzing independent projects with conventional cash flows, both the NPV and IRR will provide projections along the same lines. However when those two conditions are not met, the IRR method will become misleading. Therefore I argue that the NPV should take precedence over the IRR when only one method can be chosen. However, financial managers should be wary when using the NPV as it does not account for certain factors such as the value of waiting and cash flows that occur on a non-yearly basis. There are direct correlations between the size of a firm and the capital budgeting method most utilized. Small businesses frequently overlook the two most popular methods and opt to analyze projects with the “payback period”, which evaluates the time it will take in order to recuperate cash flows invested in a given project. The variation of this method is known as the discounted payback period, which also......

Words: 4274 - Pages: 18

Capital Budgeting

...The Capital Budgeting Practices of Listed Irish Companies Insights from CFOs on Their Investment Appraisal Techniques George Kester and Geraldine Robbins Pendahuluan Adanya keterbatasan kredit dan sumber pendanaan lainnya yang saat ini tidak menentu dan memberikan tantangan bagi lingkungan ekonomi. Prinsip kehati-hatian dalam mengevaluasi profitabilitas dari investasi modal yang diusulkan dan alokasi kelangkaan modal menjadi jauh lebih penting dari sebelumnya. Survey dilakukan pada bulan November 2009 yang ditujukan kepada CFO perusahaan masuk bursa Irlandia, yaitu bagaimana pandangan CFO tentang beberapa isu secara teori, kebijakan financial dan prakteknya di tiga area utama : kebijakan struktur financial dan keputusan financial, dividen, dan capital budgeting. Dalam survey ini juga ingin mengetahui pengaruh krisis global financial terhadap area tersebut. Sebelumnya telah dilakukan survey pendahuluan penerapan capital budgeting pada tahun 1989 dan 1993. Hasilnya tercermin dalam peningkatan kecanggihan tehnik evaluasi profitabilitas modal investment yang digunakan. Terdapat peningkatan perusahaan yang menggunakan metode Discounted Cash Flow (DCF), seperti Net Present Value (NPV) dan Internal Rate of Return (IRR). Diterapkan masing-masing maupun kombinasi dengan Metode non DCF lainnya seperti Payback. Masalah Peneliti ingin mengetahui seberapa jauh praktek penerapan capital budgeting dalam perusahaan, sehingga dapat meningkatkan wawasan dalam penilaian investasi.......

Words: 5245 - Pages: 21

Capital Budgeting

...CAPITAL BUDGETING PROCESS HSM 340 3/30/12 Organizations that decide to issue bonds generally have six steps to go through. Let’s discuss them. The first step is for the issuer to select bond counsel and the underwriter or financial advisor. The issuer and the solicitor work with these participants to structure the financing. Some basic questions need to be answered: (1) what is the purpose of the issue -- to fund a capital project, to refund prior debt, or a combination of both (2) what are the legal parameters involved -- does the capital project serve a proper legal purpose, can the debt be refunded under the federal tax rules (3) how should the bonds be sold -- through negotiation with one underwriter or through a bidding procedure with multiple underwriters (4) does credit enhancement make economic sense (that is, is the cost of the insurance or letter of credit less than the resulting debt service savings to the issuer). (1) Once the structure is formulated, the issuer needs to select the paying agent or trustee and the credit enhancer, and all the participants begin to prepare the required documentation. The underwriter or financial advisor and the issuer prepare the disclosure document which is usually called the preliminary official statement. Bond counsel drafts the ordinance or resolution and other legal documents. When the preliminary official statement is in proper form, it is distributed to potential purchasers. The marketing period usually lasts......

Words: 2477 - Pages: 10

Capital Budgeting

...Himalayan Publishing Company Case on | Capital Budgeting | August 31, 2013 | Himalayan Publishing Company: Capital Investment Decision Synopsys: Himalayan printing and publishing company is a family owned specialty printing enterprise founded by the Chhetri brothers. The firm follows a conservative capital financing approach avoiding the use of debt. Mr. Ranjan Karki, the firms current Vice-President of Finance is responsible for the both internal and external financial operation however, the scope by far is limited to internal because of the all equity capital structure the firm follows. The firm operates mainly as a full range printer of high quality, four colors offset advertising material, calendars, specialty tabloids, business printing and some books. The competition in most of their market segment is based on quality products and rapid delivery on short notice than on the price of various services. The volume in the business order has been increasing and the indications show that it will continue to increase in the future. Recently Himalayan has lost several sizable contracts because of limited capacity which lead to failure to produce the material in the short time the customer required. On the basis of the financial projections approximately Rs. 1.5 million will be available for the investment. The estimated cost of equity is calculated to be 15 percent, which has been drawn from the historical practice of internal funding. For any additional fund......

Words: 5117 - Pages: 21

Capital Budgeting

...Running head: Portfolio Project- Capital Budgeting Page 1 Capital Budgeting April Sutton July 12, 2013 FINANCIAL MANAGEMENT 3004 Instructor Nickey Turner Walden University   Running head: Portfolio Project-Capital Budgeting Page 2 INTRODUCTION Capital Budgeting is defined as the process of planning and managing a firm’s long-term investments (Ross, Westerfield & Jordan. 2013). The question of what long term investment should be made is the first step of answering this question. The issues that arise with the asking of this question will be detailed in this paper. Capital Budgeting techniques include the Payback Rule, IRR, NPV, and the Profitability Index. PAYBACK RULE The payback method indicates that an investment is acceptable if its calculated payback is less than some prescribed number of years. The payback method does not consider the present value of cash flows. Under this method, an investment project is accepted or rejected on the basis of payback period. Payback period means the period of time that a project requires to recover the money invested in it (www.accountingformanagement.org).The payback period of a project is expressed in years and is computed using the following formula: Formula of payback period: According to this method, the project that promises a quick recovery of initial investment is considered desirable. If the payback period of a project computed by the above formula is shorter than or equal to the......

Words: 1553 - Pages: 7

Capital Budgeting

... Capital Budgeting 1. Critical profitability analysis (Exhibit 1).Additional shortcomings omitted by Faulkner Poor capital-budgeting decisions can be harmful to the Sugar Lake Refining and Processing Company as it will involve spending large amounts money to be recovered for a long time. Edwards & Ivancevich, (2011) demonstrate that the other harm would be the opportunity cost arising from not taking the opportunity and it turns that a competitor comes in. The worst effect is when poor budgeting decision is made and the firm ends up losing all or part of the invested monies simply because the proposed project did not realize the expected benefits. This can be demonstrated by concerns arising from laying off workers, having to continue to meet the fixed costs as well as the wasted funds and energies in advertising (p.277). Faulkner fears of profit being overstated are unjustified especially considering that recently Butler has had inquiries from several other grocery and restaurants willing to pay the price of the product. The company inability to supply due to optimum capacity may have been the cause by management’s failure to read the market and act favorably. A better response would be to request for a survey establishing the potential of the market. Taylor and Butler discussions on the issue of availability of space for the expansion have good insights with the suggestion of leasing the company under receivership. The best decision will be reached not by appreciating......

Words: 1563 - Pages: 7

Capital Budgeting

...Capital Budgeting * Capital Budget * The amount of money set aside for the purchase of fixed assets (e.g., equipment, buildings, etc.) * Capital Budgeting * The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark. * Motivation * Replacement * Expansion * Modernization * Strategic * The Major Capital Budgeting Techniques * Payback Period * It doesn't use the time value of money principle, making it the weakest of the methods that we will discuss here. However, it is still used by a large number of companies * By definition, it is the length of time that it takes to recover your investment * Example: If a project costs $100,000 and is expected to return $20,000 annually, what’s the payback period? * Payback Period = Cost of Project / Annual Cash Inflows * $100,000/$20,000, or five years. * Net Present Value * The net present value of an investment is the present value of the cash inflows minus the present value of the cash outflows. * When Cash Flow is Even * Calculate the net present value of a project which requires an initial investment of $243,000 and it is......

Words: 1082 - Pages: 5

Capital Budgeting

...Capital Budgeting Introduction Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the firm's goal of maximizing owner wealth. A firm using capital budgeting, their goal is to see if there fixed income will cover itself for profit. Fixed incomes are things such as land, plant and equipment. When a firm using a machine to produce its good or service. They most of the time what the machine to produce the amount that they paid for the machine and more. The capital expenditure is the outlay of fund that a firm expects to produce and benefit with in a one year. The Capital Budgeting Process When approaching the problem of trying to the measure capital budgeting. The first step in capital budgeting is the Proposal generation. The proposals are made at all levels within a business organization and are reviewed by finance personal. The Second step in the process in the review and analysis. The formal review and analysis is performed to assess the appropriateness of proposals and evaluate their economic viability. Once the analysis is complete, a summary report is summated to decision makers. The third step in the process will be the Decision making. Firms typically delegate capital expenditure decision making on the basis of dollar limits. The board of directors must authorize expenditures beyond a certain amount. Often plant manager are given authority to make decisions necessary to keep the production line is moving....

Words: 2607 - Pages: 11

Capital Budgeting

...Excellence in Financial Management Course 3: Capital Budgeting Analysis Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a concise overview of capital budgeting analysis. This course is recommended for 2 hours of Continuing Professional Education. In order to receive credit, you will need to pass a multiple choice exam which is administered over the internet at www.exinfm.com/training A companion toll free course can be accessed by dialing 1-877-689-4097, option 3, ID 752. Chapter 1 The Overall Process Capital Expenditures Whenever we make an expenditure that generates a cash flow benefit for more than one year, this is a capital expenditure. Examples include the purchase of new equipment, expansion of production facilities, buying another company, acquiring new technologies, launching a research & development program, etc., etc., etc. Capital expenditures often involve large cash outlays with major implications on the future values of the company. Additionally, once we commit to making a capital expenditure it is sometimes difficult to backout. Therefore, we need to carefully analyze and evaluate proposed capital expenditures. The Three Stages of Capital Budgeting Analysis Capital Budgeting Analysis is a process of evaluating how we invest in capital assets; i.e. assets that provide cash flow benefits for more than one year. We are trying to answer the following question: Will the future benefits of this project be large enough to justify...

Words: 5166 - Pages: 21

Capital Budgeting

...Mary E. Jones 2/27/2011 ACC 560 Week 8: Case 4 Greetings Inc: Capital Budgeting 1. Calculate the net present value using the numbers provided. Assume that annual cash flows occur at the end of the year. Initial investment $800,000 Estimated useful life 5 years Estimated salvage value -0- Estimated annual cash flows Annual cash flow savings for Wall Décor $175,000 Annual additional store cash flow from increased sales 100,000 Sale of ink and paper supplies 10,000 Net annual cash flow $285,000 Present Value at 12% Discount factor for 5 periods 3.60478 Present value of net cash flows $$285,000 X 3.60478 $1,027,362 12% Present value of net cash flows $1,027,362 Capital investment 800,000 Net present value $ 227,362 2. Mr. Burns is concerned that the original estimates may be too optimistic. He has suggested that you do a sensitivity analysis assuming all costs are 10% higher than expected and that all inflows are 10% less than expected. Initial investment $880,000 Estimated useful life 5 years Estimated salvage value -0- Estimated annual cash flows Annual cash flow savings for Wall Décor $157,500 Annual additional store cash flow from increased sales 90,000 Sale of ink and paper supplies 9,000 Net annual cash flow $256,500 Present Value ...

Words: 371 - Pages: 2

Capital Budgeting

...Capital Budgeting By Joan Shoueka Capital Budgeting is defined in accounting and finance as “the planning of long-term corporate financial projects relating to investments funded through and affecting the firm's capital structure (Wikipedia, 2014).” It allocates resources for major capital or investment expenditures. Creating and implementing a budget is crucial to any business or organization for many reasons. One reason is because “it creates a structured step by step process that enables a company to develop and formulate long-term strategic goals, seek out new investment projects, estimate and forecast future cash flows, facilitate the transfer of information & lastly, monitor and control expenditures (Investopedia, 2014).” “Preparing a capital budget is also necessary in order to increase profits and minimize costs. Most businesses and organizations typically plan a budget for a 12-month period, which allows management to take a look at a bigger picture. A capital budget differs from a short-term budget in that it takes a look at long-term investments, examining the purchase or upgrade of fixed assets such as buildings, machinery and equipment (Ehow.com, 2014).” There are also many reasons to make hefty investments. One important intention is that it helps to expand the level of operations for a business or company. A growing company often needs to acquire new fixed assets in order to produce work in a timely fashion. Then as the company expands......

Words: 1122 - Pages: 5

Capital Budgeting

...Capital Budgeting Firms continually invest funds in assets and these assets produce income and cash flows that the firms can then either reinvest in more assets or pay to its owners. These assets represent the firm's capital. Capital is the firm's total assets and is comprised of all tangible and intangible assets. These assets include physical assets (such as land, buildings, equipment, and machinery), as well as assets that represent property rights (such as accounts receivable, notes, stocks, and bonds). When we refer to capital investment, we are referring to the firm's investment in its assets. The term "capital" also has come to mean the funds used to finance the firm's assets. In this sense, capital consists of notes, bonds, stock, and short-term financing. We use the term "capital structure" to refer to the mix of these different sources of capital used to finance a firm's assets. The term "capital" in financial management, a firm's resources and the funds committed to these resources, does not mean the same thing in other fields. In accounting, the term "capital" means the owners' equity, the difference between the amount of a firm's assets and its liabilities. In economics, the term "capital" means the physical (real) of the firm, and therefore excludes the assets that represent property rights. In law the term "capital" refers to the amount of owners' equity required by statute for the protection of creditors. This amounts to the "stated capital", which often is...

Words: 1074 - Pages: 5

Capital Budgeting

...Handouts for Corporate Finance 1 Capital Budgeting Introduction A logical prerequisite to the analysis of investment opportunities is the creation of investment opportunities. Unlike the field of investments, where the analyst more or less takes the investment opportunity set as a given, the field of capital budgeting relies on the work of people in the areas of industrial engineering, research and development, and management information systems (among others) for the creation of investment opportunities. As such, it is important to suggest that students keep in mind the importance of creativity in this area, as well as the importance of analytical techniques. Because a project is financially sound, it must be ethically sound, right? Well . . . the question of ethical appropriateness is less frequently discussed in the context of capital budgeting than that of financial appropriateness. Consider the following simple example: The American Association of Colleges and Universities estimates that 10 percent of all college students cheat at some time during their postsecondary education careers. You might pose the ethical question of whether it would be proper for a publishing company to offer a new book How to Cheat: A User's Guide. The company has a cost of capital of 8% and estimates it could sell 10,000 volumes by the end of year one and 5,000 volumes in each of the following two years. The immediate printing costs for the 20,000 volumes would be $20,000. The...

Words: 3456 - Pages: 14

Capital Budgeting

...CHAPTER ONE Introduction Understanding and being able to use capital budgeting techniques and investment appraisal tools is usually a standard requirement for most business degrees. In addition learning such methods will also give one an advantage in a real business situation, in which there is the consideration of significant capital expenditure project. Capital budgeting assists management decisions making on the process of ensuring growth of the organization. The techniques are divided into two types: one, Traditional (non-discounting) that includes pay back method, accounting rate of return (ARR). Two, discounting cash flow that includes net present value (NPV), internal rate of return (IRR) Profitability Index (PI). Before an investment appraisal is conducted, there are a number of points to keep in mind. Whilst the tool presented will give an evaluation of the worth of a project, one should consider that the answer is only a guide. In short, the results of an investment appraisal should be considered in conjunction with both common sense and other qualitative factors such as a business’s overall strategy. Secondly, before an investment appraisal is conducted, one should consider whether or not the project is mutually exclusive. Where a project is mutually exclusive, then only the best project should be selected. Where on the other hand, projects are independent; one may select all projects which give the appropriate return. 1.1 Background of the study Corporate......

Words: 7901 - Pages: 32

Capital Budgeting

...Excellence in Financial Management Course 3: Capital Budgeting Analysis Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a concise overview of capital budgeting analysis. This course is recommended for 2 hours of Continuing Professional Education. In order to receive credit, you will need to pass a multiple choice exam which is administered over the internet at www.exinfm.com/training A companion toll free course can be accessed by dialing 1-877-689-4097, option 3, ID 752. Chapter 1 The Overall Process Capital Expenditures Whenever we make an expenditure that generates a cash flow benefit for more than one year, this is a capital expenditure. Examples include the purchase of new equipment, expansion of production facilities, buying another company, acquiring new technologies, launching a research & development program, etc., etc., etc. Capital expenditures often involve large cash outlays with major implications on the future values of the company. Additionally, once we commit to making a capital expenditure it is sometimes difficult to backout. Therefore, we need to carefully analyze and evaluate proposed capital expenditures. The Three Stages of Capital Budgeting Analysis Capital Budgeting Analysis is a process of evaluating how we invest in capital assets; i.e. assets that provide cash flow benefits for more than one year. We are trying to answer the following question: Will the future benefits of this project be large......

Words: 5166 - Pages: 21