Acc515 Accounting And Finance- Capital Assessment Answers

Part A

Part B

Part C

Answers

Part A:

Identifying the significance of ethics in capital budgeting with relevant examples:

Capital budgeting is one of the significant attribute, which allows the company to improve its overall financial capability and increase its future income. In addition, the ethical measure in capital budgeting process mainly allows the company to utilise the overall financial resources for increasing profitability. The relevant attributes of ethical consideration needs to be contemplated for improving the overall profitability of the company. Relevant factors such as responsibility, decency, and honest bookkeeping needs to be comprehended within the confinements of ethical capital budgeting. In this context, Dellavigna & Pollet (2013) mentioned that use of adequate ethical measure in capital budgeting could effectively help in drafting adequate budget, which is able to comprehended all the relevant activities of the company.

Moreover, the overall capital budget mainly depicts the relevant measures, which needs to be taken by the management to provide the required funds to each activity. Any unethical measures used in the capital budgeting formulation could result in non-distribution of adequate resources, which in turn could reduce profitability of the company. Furthermore, the capital budget needs ethical consideration, as it helps in improving the overall viability of the budget. The ethical capital budgeting mainly allows companies to contemplate projected cash inflows, monitor expenditure, control expenditure, and evaluate projects. Abor (2017) argued that capital budget does not allow companies to comprehend the actual expenses needed by the company.

Part B:

i) Categorising the Medigard’s capital structure into debt and equity capital:

ii) Calculating after-tax Weighted Average Cost of Capital:

iii) Determining the adequate capital structure to lowering the cost of capital for the company:

The company could decline its overall debt exposure for reducing the overall cost of capital that is encircling its activities. In addition, the following table could be evaluated as effective measures, which could help in reducing cost of capital of the company. The reduction in debt of the company from 15.86% to 10% could eventually help in reducing the cost of capital from 1.70% to 1.68%. This mainly indicates that decline of debt could eventually help Medigard Limited to reduce its overall cost of capital (Krüger, Landier & Thesmar, 2015).

Part C:

a) Depicting whether the project should be accepted:

The overall NPV of the project is relevantly adequate and provides a higher return from the investment. In addition, the projects provides an IRR of 30% with PI of 1.4 and net present value of 21,443.95. Furthermore, the payback period is at 2.63 years and discounted payback period of 3.61 years. This mainly allows the company to effective detect viability of the project. Thus, by evaluating all the investment appraisal sections the project should be accepted by the company (Bas, 2013).

b) Depicting whether project should be accepted with required return of 20%:

Reference:

Abor, J. Y. (2017). Evaluating Capital Investment Decisions: Capital Budgeting. In Entrepreneurial Finance for MSMEs (pp. 293-320). Springer International Publishing.

Bas, E. (2013). A robust approach to the decision rules of NPV and IRR for simple projects. Applied Mathematics and Computation, 219(11), 5901-5908.

Dellavigna, S., & Pollet, J. M. (2013). Capital budgeting versus market timing: An evaluation using demographics. The Journal of Finance, 68(1), 237-270.

Fallon, J., & Cunningham, M. (2014). Regulatory Precedents for Setting the WACC within a Range.

Kashyap, A. (2014). Capital Allocating Decisions: Time Value of Money. Asian Journal of Management, 5(1), 106-110.

Krüger, P., Landier, A., & Thesmar, D. (2015). The WACC fallacy: The real effects of using a unique discount rate. The Journal of Finance, 70(3), 1253-1285.