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Factors in Capital Budgeting Decisions

Imagine you are a representative of management in the company you have selected for your Week 6 Assignment and you must make a capital budgeting decision. The decision is to implement a new computer network system to decrease the time between customer order and delivery. The cost will be 10% of last year’s profits. You are charged with describing the important considerations in the decision-making process to upper management. In your response, be sure to include the following:

A description of the important factors, in addition to quantitative factors, that were considered when making this capital budgeting decision.

An explanation of how these factors are significant to the company.

A summary of how you will determine the criteria to rank capital budgeting decisions and whether some criteria are more important than others.

A calculation of the proposed return on investment based on criteria you select and justification for that ROI.

Develop a 200 – 250 word explanation supporting your recommendations.

Tip: For help with reading an annual report access this handy guide from

Money Chimp(Links to an external site.)

(http://www.moneychimp.com/articles/financials/fundamentals.htm)

Aarti J · Accepted Answer

Discussion Post
Assuming that I am a representative of management in the company, home depot and I would like to have a capital budgeting decision which requires the investment of 10% of the last year’s profit which will be used to implement a new computer network system which will help in decreasing the customer order time and delivery. Some of the important factors which will be analysed before implementing the decision. Some of the major factors that would be considered would include the minimum rate of investment, the culture of the company, the effect on the employee and the transition of the machinery. All these factors would be important and significant to the company and would be one of the driving factors of the future earnings and investment. 
For a company the factors like the earnings, the culture of the company which is the base of the company and helps the company to run plays an important factor in the capital decision making.
Some of the major criteria that would be used by the company to rank the project would include the minimum rate of investment i.e. 10%, the present value of the cash flows or the NPV of the project should be positive and the company should have the payback period of 3 years maximum. These are some of the determinants and criteria which should be considered before deciding on the project. 
Considering that the computer system will cost $75000 and the increase in after tax earnings would be $25000 per year for 4 years.

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