Business Capital Cost Management - Case Study Example

Payback period in business is the time that a given asset will take to return the money that was used in its purchase or investment, or the period of time taken by the business to begin earning profit (breakeven) according to Arnold (2014, pp 45) and Drury (2013, pp 29). The payback period in this case is obtained by dividing the initial investment by the cash flow per year. Return on capital employed is the other important factor to note in business. This is the sole indicator of profit or loss making in the company which seeks to compare the ratio of the returns with the financial input placed in the business.

Bosch Gateau’s investments in the apricot cream machine are likely to take two years for it to be able to pay back on the capital money. Understanding the time that the company would take to recover the liquid capital that is paid in the purchase of the apricot Machines to be used in the mechanized production of cream cake will increase the company’s sales by increasing the number of items sold by the company. To be able to get the number of years that the company will have to take before retrieving the amount incurred in the new project, one will have to divide the initial capital of purchasing the machines by the amount of money that the project will save the company. The initial capital that will be used in the purchase of the machines to be used the mechanized manufacture of the cream cakes will be 200, 000 pounds. The return that will be added to company’s existent income is 170,000 pound every year. Other expenses that are going to be incurred by the company about the adoption of the new machines will amount to 105,000 pounds. The total cost of investment in the new machinery to be used in the plant will, therefore, be 305,000 pounds. It will be true to say that that investment saves the company an extra 170,000 pounds every year which means that the company has to divide the 170,000 pounds over the total amount invested in the new project. In this case, the payback period will be less than two years since it will take 1.794 of a year to recover everything. In this case, I would recommend the purchase of the new machinery which will imply the sale of the apricot cream cake.

Bosch Gateau should also consider the return on the capital employed, which is a denominator in the sum of the shareholders equity and sum liability. Return on capital employed is calculated using the capital employed by the company. There is a direct relationship between the capital and the profit that is going to be earned by a specific company. The profit that is going to be made by the company after the incurring of the cost of buying the machinery is going to be realized by more than 100% after the payback period is over. It is seen that the company is going to benefit by earning more profits than it had earned before. The 170,000 pounds is going to be taken by the company taken in by the company as pure profit after the two years. Having an ordinate amount of cash at hand might make it hard or the business to understand whether the new investment is bringing it the profitability that it needs. There might be an improved scale of business arising from a company’s financial activities but this is will not always be a depiction of the companies.

Net present value, being among the key factors that should be considered when making the peach apricot cream machine investment, refers to the difference between the present value of cash inflows and the present value of cash outflows. The net cash flow during the period of running the project and the total investment cost include the variables that determine the net present value of the business. Considering the 10% discount rate on all the partials, it means the company will have a lower net present value. The smaller payback period covers up for the financial inconvenience that could have brought by the higher discount rate which the net present value. Measuring the future cash flows in company can be determined by the

Net present value is an accurate tool in evaluating projects in organizations. This is because of its ability to look at the financial capability of the company at the present and also in the future. Net present value can determine the financial desirability of a project that a company seeks to implement. It does this by analyzing the short term and long term profitability of that project, and also the company’s ability to sustain the project without altering its income for a certain period. The financial returns of the project are also analyzed by net present value.

The technique used by net present value in the analysis of the financial desirability of a project is deemed to be efficient because of the way in which it estimates the expected cash flows that the newly acquired project would generate. This implies new cash flow that the company is going to generate as a result of the new project. Two years after the purchase of the new machinery to be used the increased production of each apricot machine cake, the companies can double its net worth. The net present value and the net worth of the company after some two years show the importance of undertaking the project. Net present value, therefore, is a factor that offers the necessary comparison to be used in the comparisons of the financial conditions between the times of their adoption and sometime later.

Although net present value is much dependent on the use assumptions and estimates, it can still show the desirability of undertaking a certain project. It is, therefore, easy for a business to estimate that amount of money that it will be making die to the adoption of a certain policy or project. The fact that NPV is much dependent on estimates also makes it easy for the officials within a company to be the ones to determine the functionality of certain project and some returns and profitability that it might bring to the business. The only thing that one would need to have while determining the desirability of a project by using NPV is the payback period and the discount rate applicable the initial amount of capital.

Offering customers discount is an approach that would see an increased sale of the company’s products. However, it might be hard for the company to eliminate bad debts with the adoption of such marketing policy. 1% of the sales might differ according to the different sales that the company makes with different customers. The company is already burdened by a 40,000pound annual figure of bad debts. The chances of the new technique increasing the number of bad debtors within the company are likely to go up following the 900,000 to 40,000 ration. The economic implication that this move is going to have on the company will be normal. Since the scale of the company’s business undertaking s is going up, it will be advisable that the company manages its discounting activities by limiting them to the recognized debtors. By offering discounts on an early payment basis, the company is likely to reduce the number of bad debts. Most of the creditors will want to pay earlier in a bid to avoid having to pay higher for the products they buy.

The move to offer a 1% discount the customers who are going to ay earlier than the 30-day deadline will increase the company’s sales and at the same time limiting the losses incurred by the company due to bad debts. This is a cheaper way of avoiding bad debts in the company and encouraging quick purchases. The same customers who will pay earlier than it usually is are going to make a new purchase on debt. This will, in turn, give the company overall long-term profitability due to the high sales recorded. The discounting policy will imply that customers who pay their debts in time can make new purchases. Administration costs related to the introduction of the discount policy are going to increase. The increment does not, however, march the losses that the company would have incurred due to bad losses.

The policies that can be adopted by the company following the finance capital needs will have to consider the relative cost and risk of short-term and long-term debt finance. The cost is seen in the light of the labor costs incurred during the collection of the debts, and this influences how the company would choose on how to sell its products on debt (Li, Lee, & Walker 2015, pp 34). Bad debts are the other factor stands to impact on the company’s choice of financial policy. I recommend the adoption of a policy that would see the prices of products go up when sold on debt. The length of the period I which the debt would be paid would also be considered in such a case. This, therefore, implies that the debiting scheme of the company will apply basing on the length of the payment period. Different rates are to be calculated and applied on the amount of money. Business expense reimbursement theory is another policy in finance that can work well with the company.

Current assets in the short term investments do not qualify to be categorized as cash equivalents due to their high liquidity. Assets that are held to maturity, therefore, qualify to be categorized under the current assets. They include the bond securities and debt securities held by Bosch Gateau. Corporate bonds held by the company with no intention of being turned into immediate cash. An appropriate policy that should be adopted considering the current assets of Bosch Gateau includes internal billing transactions policy.

The most observable difference between debt and equity is seen in the legal protections offered. In equity, any financial undertaking is seen as a joint venture whereby the outcome is shared equally amongst the concerned parties. In equity, the security of one capital invested in a certain business which has been proposed by another is embraced through equal sharing of profits. Equity, therefore, has a bigger risk of getting nothing from a given venture, unlike debt whereby the money or product given out on the debt will be paid fully by interests within the agreed period. In the case of debt, one gets paid before the profit is considered.

A company may choose to use debt in a case whereby it considers venturing into an activity as a single entity (Horngren et al 2013, pp 72). This will involve taking a loan from a financial institution which will charge the company interests after a certain mount time. Using debts is the most common form of financial policies that are used by many companies that do not want to have the issue of profit making open to other organizations or companies. In the case of equity, the company will have to approach a financial institution for the purpose of contributing to the implementation of a project for shared outcomes which may be valid for a certain period (Peirson et al 2014, pp 49). Choosing to use equity at the expense of debt can happen when a company is endeavoring to spread risks.

Jessie will have to consider using a bank loan so as to raise the 500,000 pounds needed for the purchase of a competitor’s plant. A bank loan will be convenient because it will add to the company running capital and liquid. The amount of the company’s net present value will greatly determine the choice of borrowing a bank loan for the purchase of the new business.