ECON 351 Financial Economics : Expenditures and Non-Economic Expenditu

Investment Detail

The capital investment project is of utmost importance in relation to investment control. The purpose of capital investment project is to check and measure the acceptability of the project in terms of the benefit it generates.

The aspects of the investment project that have been asked to identify and describe are Capital Expenditures, Raw Materials and Cash for operations.

Capital Expenditures can be defined as those expenditures whose perks are to be considered for a time period more than one year. Capital expenditures do not get created very often, but they are essentially for larger sums of money. Capital Budgeting or Capital Expenditure Analysis involves determining the value potential of a project/investment. This is known as Net Present Value (Cvijanovi?, 2014). Capital Expenditure can be divided into three different forms that are cost reducing expenditures, increasing the revenue related expenditures and non-economic expenditures. In simple terms of accounting, a particular expenditure is said to be a capital expenditure when a capital asset is purchased or a specific investment is incurred that extends the utilizable life of the capital asset. The value of capital expenditures a firm will most probably incur is dependent on the type of industry it occupies (Cho, Freedman & Patten, 2012).

Raw materials are essentially substances that are used in the primary manufacturing of inventory or goods. Raw Materials have a totally different or separate market which is called the factor market, as raw materials are primarily factors of production including capital and labor (Kingsman, 2014). In more simple accounting terms, when the raw materials are used, there is a reduction in the raw materials inventory and simultaneously the work in progress account increases and finally transferred to the finished goods (Tung, 2012). 

Cash for operations or cash flow analysis is a very complex process for both investors and companies. Cash for operations primarily refer to the monetary benefit generated by the core or major business activities of the company. It provides a clear image of the entire picture of the of the company’s health. Upgrading or installing new equipment and purchasing another company, these types of activities lead companies to incur expenses which are record as negative cash flow. Similarly, in case a company decides to sell the old equipment, these activities are also treated as investing activities (Chen et al., 2012).

Financial Details

a. Profit and Loss Projections

b. Cost Projections

c. Cash Flow and IRR

IRR:

Opportunities and Threats

For the easy understanding of the opportunities and threats that are related to venturing into an investment project, the investment in a smart watch manufacturing company is taken into consideration (Bundy, Shropshire & Buchholtz, 2013).

Actions to mitigate identified threats should be like internal organizational communication should be improved so that internal and external communication is done in a better way. The planning strategy should be well thought, practical, easy to implement and simple to understand. Research and development is a very crucial part of an organization and sincere steps should be taken in order to exclude any kind of related issues. Plan to increase productivity should be without loopholes. Issues related with increased number of competitors can be solved with further innovation in product manufacturing and technology. Central rules and regulations monitoring organizational policies should be in such a way that a general policy does not affect the firms.

Operating Plans / Strategies

The operating plan for a successful manufacturing business venture is that the budget development plan should be linked with corporate strategy. This is because the budget constitutes of the plans and strategies linked with evaluating the productivity, revenues and other expected losses, thus the corporate strategy should be framed in such a way that it is in accordance with the budget planning.

Resources should be allocated in a strategic manner so as to ensure optimum utilization of all the resources.

Affix incentives to measure the performance hike so that the employees are motivated in such a way that they perform in the best manner.

The next measure should be that the budget complexity should be reduced that is the allocation decisions should be taken quickly, targets should be achieved in less time and organizational operations should be carried out without further disturbance.

The budget should also be flexible in order to accommodate change (Bullinger & Warschat, 2012).

References:

Bullinger, H. J., & Warschat, J. (Eds.). (2012). Concurrent simultaneous engineering systems: the way to successful product development. Springer Science & Business Media.

Bundy, J., Shropshire, C., & Buchholtz, A. K. (2013). Strategic cognition and issue salience: Toward an explanation of firm responsiveness to stakeholder concerns. Academy of Management Review, 38(3), 352-376.

Chen, Q., Chen, X., Schipper, K., Xu, Y., & Xue, J. (2012). The sensitivity of corporate cash holdings to corporate governance. The Review of Financial Studies, 25(12), 3610-3644.

Cho, C. H., Freedman, M., & Patten, D. M. (2012). Corporate disclosure of environmental capital expenditures: A test of alternative theories. Accounting, Auditing & Accountability Journal, 25(3), 486-507.

Cvijanovi?, D. (2014). Real estate prices and firm capital structure. The Review of Financial Studies, 27(9), 2690-2735.

Kingsman, B. G. (2014). Raw materials purchasing: an operational research approach (Vol. 4). Elsevier.

Tung, J. (2012). A study of product innovation on firm performance. International Journal of Organizational Innovation (Online), 4(3), 84.

Yuan, H. (2013). A SWOT analysis of successful construction waste management. Journal of Cleaner Production, 39, 1-8.