Large Cost Associated With Capital Projects - 967 Words

Whenever an organization is expanding, there are several major complexities which can arise. As defined by Investopedia, â€Å"A capital project is a lengthy investment used to build, add or improve on a project. It is any task that requires the use of significant capital, both financial and labor, to start and finish. Capital projects are defined by their large scale and larger cost relative to other investments that involve less planning and resources.† (Investopedia: Capital Project) Obviously the most common complexity with expansion via capital projects would be large cost associated with the expansion. In order for an organization to expand, they will need additional finances and resources in order to fund the expansion. The large†¦show more content†¦To address the issue of difficulty entering the new market, during the timeframe in which profits are being set aside to fund the future expansion, detailed research and analysis should be completed on: the m arket, consumers, competitors, and the competitor’s products. This analysis will allow the organization to review whether the expansion should occur and whether the benefits of entering the market outweigh the risks being taken. Inherently, the interests of stockholders and managers are different. Stockholders wish to maximize profits for the company and are really only concerned with the bottom-line of the organization. As managers are mainly concerned with the day to day operation of the company and naturally have an invested interest to have the highest income they can, which in return increases expense and therefore reduces profits. However, there are a few ways that the company could create a convergence between the interest of the stockholders and the managers. One such way would be to compensate management with yearly financial bonuses based off the company’s performance and profitability. By doing this, it creates a win-win environment where if the company’s performance and profitability increases than management will receive an increase in income. Furthermore, this becomes an endless cycle where the manager’s increase in income becomes the driving force behind managementâ €™sShow MoreRelatedManaging Capital Projects For A High Risk World1311 Words   |  6 PagesThe article I chose is from Forbes.com. The title of my article is Managing Capital Projects in a High-Risk World. In summary, the article discusses the importance of capital project risk management when it comes to organizations. When it comes to capital projects, there are many things that need to be addressed. A few of them are cost, financing, and difficulties of partnerships with contractors or joint venture participants. Regulations related to health, safety and environmental matters must alsoRead MoreCapital Budget Paper971 Words   |  4 PagesWeek 4 Assignment Integrative Problem and Study Questions 1. Why is the capital-budgeting process so important? Capital budgeting decisions involve investments requiring large cash outlays at the beginning of the life of the project and commit the firm to a particular course of action over a relatively long period of time. As such, they are costly and difficult to reverse, both because of: (1) their large cost and (2) the fact that they involve fixed assets, which cannot be liquidatedRead MoreAmeritrade- Case Study Report (Assignment)1540 Words   |  7 PagesCorporation (AHC) plans to invest in advertising and technology in order to increase their consumer base and thus revenues. 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Demand Price VC FC Profit Probability 150000 170 4500000 20000000 1000000 0.25 250000 180000 170 5400000 20000000 5200000 0.5 2600000 200000 170 6000000 20000000 8000000 0.25 2000000 4850000 Est. Profit The second scenario has fixed costs of $25 million, but a higher selling price of $200. These changes need toRead MoreFinance Week 61558 Words   |  7 PagesCourse Project Part II Introduction You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5). Task 4. Capital Budgeting for a New Machine A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine