week 11

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Apr 3, 2024

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Managerial Finance Ankita Kulkarni Managerial Finance Ankita Kulkarni University of Cumberlands (BADM-534-M50)- Managerial Finance Dr Dale Prondzinski March 17, 2024

Managerial Finance Ankita Kulkarni 1) Identify the major project classification categories for Davis Industries and why they are used. - The three main classification areas for Davis Industries are: cost reduction, company expansion, and adherence to environmental and safety requirements. All of these elements were selected because they would help the business as a whole without sacrificing external issues like mother nature in terms of potential waste or negative consequences of tools or products. The replacement of expensive machinery and business expansions aimed at boosting profitability form the cornerstone of the company's capital decision-making process. 2) Which project classification require the least detailed and the most detailed analyses in the capital budgeting process? - The most thorough would be the market expansion, as it would necessitate a thorough analysis of the market and its associated variables to make an excellent or optimal option for such an expansion. Since it is easy to estimate or request such pertinent charges from third parties, the lease would be regarding replacement or cost reduction. 3) Distinguish between independent and mutually exclusive projects for Davis Industries. - Independent initiatives are ones that are up for selection provided they are advantageous to the business. It could involve deciding which commercial endeavors to take on in order to maximize profits. Mutually exclusive ones, on the other hand, are those where only one should be selected, such as the machines mentioned above, as one should be adequate for its intended uses. 4) Calculate the payback period and profitability index for each machine. Project A

Managerial Finance Ankita Kulkarni Payback Period= 2.5 years Profitability Index = 1.07 Project B Payback Period= 3.33 years Profitability Index = 1.14 5) Calculate net present value (NPV) and internal rate of return (IRR) for each machine. Project A NPV= 3,289.02 IRR= 13.57% Project B NPV= 6,861.80 IRR= 15.24% 6) Using the NPV technique, which machine should be recommended? The project B must be chosen since it has higher NPV than Project A meaning it will have more benefits to the company. 7) If the purchase of the machine A and machine B are independent projects, which project should be accepted? If it is independent, the company will have to choose both since the NPVs, Profitability Index are positive and therefore would surely add value to the company.

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Managerial Finance Ankita Kulkarni 8) Explain capital rationing. The technique of imposing limitations or creating barriers while selecting an investment is known as capital rationing. The business will be able to gauge how much they are willing to contribute in this way. 9) Identify three explanations for capital rationing. Capital rationing includes: 1) To what extent does the company is willing to forgo just to proceed with an investment 2) The availability of funds to use or the access of the companies to get such funds will determine your capital rationing 3) The Companies management or policies on to which should be considered when choosing capital requirements to certain projects. 10) How can Davis Industries handle its capital rationing situations? The business must think about obtaining a loan from banks or other financial organizations in order to finance any growth or this machine acquisition because it lacks capital and sufficient staff. Since these monies can be utilized to acquire such manpower, they can help address the issue of insufficient personnel. Actually, something should come of it, and if it does, it can be used to settle this loan. Project A PBP= 50,000 - 25,000 - 20,000 = 5,000

Managerial Finance Ankita Kulkarni so: 2 years + 5,000/10,000 = 2.5 years Project B PBP = 50,000/15,000 = 3.33 years

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