Capital Budgeting

Capital Budgeting

Question 1: Financial possibilities of the project

Pay as you go financing refers to the practice of paying for projects with cash that is already available, that is, in hand rather than depending on funds from non-existent sources. (Goizueta, 1976) It is one of the financial possibilities available and which is most likely to reap a lot more harvest. This is because this method of financing ensures that no debt is incurred throughout the project as there is no borrowing of capital and that the required funds are extracted from an existing source only. It also ensures that no extra funds are put into use and this goes an extra mile in avoiding debts. Some of the benefits accrued from pay as you go include conservative approach which refers to a strategy adopted by an organization to finance a project from a long-term source which in this case is the money saved up for the project at hand; there’s no debt incurred since the funds are readily available and the organization is seen to be well-equipped in terms of its financial standards. Besides its advantages, it also has its demerits. To begin with, it reduces the number of capital gains. (Goizueta, 1976) It also contravenes intergenerational equity which is the practice of having those benefitting from a project pay for it. Pay as you go also creates a higher variation in year to year expenses

Pay as you use is also a financial possibility that could be applicable in this case. Cost used is spread over to the future; it promotes intergenerational equity and avoids instability in revenues and expenses. However, the costs incurred on the project go beyond its usefulness. Also, a shift in the social, economic and political priorities may affect pay as you use mode of financing. (Goizueta, 2013).Pay as you go would be an appropriate cause of action so as to make sure that the project does not stall halfway but may end up being ineffective because not everyone is able to access the money as easily considering that some of them may be unemployed. On the other hand, pay as you use could be more effective as funds for the project are carefully planned for and sought even as the project is in progress. Therefore, it would be more appropriate to build a new high school rather than an extension.

Question 2: Capital Budgeting

In financing capital projects there are two major ways that could be implemented. These are debt and knowledge in mathematicsand to which each has its pros and cons. Capital budgeting in this case is being used as a means to evaluate on the cost. There would be incurred a larger expenditure should the management of the school decide to build new blocks as opposed to extending the already existing ones. For instance, they would require purchasing new equipment and a huge amount for new constructions. The intention of this report is to decide on a rather affordable and effective means with the aim of minimizing on the cost of the project. In determining the perfect means to finance the project; I did an analysis of the advantages and disadvantages of both finance methods. In the case of equity financing, the institution will require a reliable payment plan and would have to hassle a lot. Alternatively, debt financing would require the institution to surrender part of its assets in the event that there occur trouble paying back. This works as collateral.

Capital Budgeting Analysis

The way we spend our money today is a great determinant of our financial position in future. As such, the future benefits of the project should be visible enough to justify the huge investment and the risk involved. To evaluate the project I have included three stages within the analysis which include; Option pricing to establish position, decision analysis for knowledge building and Discounted Cash Flow (DCF) for making the investment decision. The pressing point should be not to necessarily force decisions to fall into discounted cash flows. The process of decision making on analysis, Discounted Cash Flow (DCF) and that of option pricing are very vital in the management of finances. Due to uncertainty, it is important to estimate the cash flow with the project variables. An analytical hierarchy attributes for a systematic judgment and assumptions on the expected values.

Question 3: Things learned from the lecture.

Intergenerational equity is a practice that is in line with pay as you go which means that individuals who benefit from a service should be the ones to pay from it. Capital budget analysis should be outlined in terms of political need, economic analysis, and the degree of fairness on the population and the visibility of the project. Pay as you use has much more advantages than pay as you go and in the long run always proves to be worth the struggle. This is because pay as you go May not guarantee the success of the while pay as you use may have a lot of drawbacks along the way but may end up being more effective.

Question 4: Things that need to be explained in more details

The conservative approach which is an advantage of the pay as you go requires deeper explanation to show how effective it is as a form of financial capital expenditure. The drawbacks also need to be well explained to show their competitiveness in relation to those of pay as you go and hybrid. Capital budget analysis processes should also be well outlined. For instance, economic analysis should be widely and clearly covered with an inclusion of figures, as well as project visibility.

Question 5: County Government CAFRs  

            The Comprehensive Annual Report consists of the state financial report and is compiled by either a government accounting staff or a municipal of the state. It is also audited by the American Institute of Certified Public Accountants using Governmental Accounting Standards Board (GASB) specifications. GASB is a body whose task is to provide standards for the content in Codification of Governmental Accounting and Financial Reporting Standards. Its major role is to identify the financial position of the county as well as its financial activities for the past year. This report is a requirement that must be produced yearly as stated in law. Schools are also expected to educate students on budgets and its importance.

Reference

Goizueta, M. F. (1976). Financial management analysis applied to capital budgeting: The range of optimum investment. S.l.] 1976.