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LASA 2: Airvalue Airways Strategic Planning
Finance & Accounting
Pages 6 (1506 words)
Question 1. Describe for other members of the strategic planning committee the role that capital budgeting should play in corporate strategic management. Answer. Strategic management analyzes organization’s mission involving company resources and performances in external environment.
Budget in the context of capital budgeting is the plan that describes in detail inflows and outflows of revenue and expenses during the project life. The project life for this case is 10 years. Budget will show the company detail plan of cash inflows and outflows during the 10-year operation period of the aircraft. The two words together – capital budget indicates a list of planned long-term investment outlays for projects. In this case, planned investment is to purchase one of two aircrafts and make additional profits from its operation. Capital budgeting is the method used to determine which among long-term capital investment should be chosen. In this case, we are determining one project – purchase of an aircraft. However, we are using two different aircrafts. For simplicity, two different aircrafts are considered as two separate projects. Capital budgeting process helps strategic planning committee pick up the option, which gives higher rate of return considering time value factor of money. This is why it is important in strategic management. Without capital budgeting strategic management team will enter into a wrong selection. Question 2. Explain why the NPV and IRR capital budgeting tools are superior to the accounting rate of return and simple payback techniques for determining the attractiveness of capital investment opportunities. Answer. ...
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