create the remaining portions of your business plan and complete a capital budgeting plan. Your plan should include:
A Financial Model
Financial Projections
Return on Investment (ROI)
Managing the Cost of Capital
Capital Budgeting Plan
Manage the cost of capital in order to maximize profits, including a discussion distinguishing working capital and net working capital.
Discuss at least two strategies required for managers related to planning for capital expenditures.
Address the tradeoff between profitability and risk as they are related to capital.
You will submit this final portion along with the portion previously submitted in Unit III. Be sure you have updated the sections after review and incorporate the feedback from the professor.
Include the following:
Executive summary
Business Description
Time Value of Money
Four Basic Financial Statements – put in the Appendix
Financial Model Used
Financial Projections
Return on Investment (ROI)
Managing the Cost of Capital
Capital Budgeting Plan
Full Answer Section
Return on Investment (ROI)
ROI is a measure of the profitability of an investment. It is calculated by dividing the net income from the investment by the total cost of the investment. ROI is used to evaluate the attractiveness of different investment opportunities and to track the performance of existing investments.
Managing the Cost of Capital
The cost of capital is the rate of return that a business must earn on its investments in order to meet the expectations of its investors. The cost of capital is influenced by a number of factors, including the riskiness of the business, the interest rate environment, and the company's credit rating.
Capital Budgeting Plan
A capital budgeting plan is a document that outlines a business's planned capital expenditures. It describes the projects that the business plans to undertake, the amount of money that will be spent on each project, and the expected financial return from each project. The capital budgeting plan is used to ensure that the business is investing its money wisely and that it is meeting its financial goals.
Managing the Cost of Capital in Order to Maximize Profits
There are a number of ways that businesses can manage their cost of capital in order to maximize profits. Some of the most important include:
- Choosing the right financing mix. Businesses can choose between a variety of financing options, such as equity, debt, and hybrid financing. The cost of capital associated with each financing option is different. By choosing a financing mix that minimizes the cost of capital, businesses can maximize their profits.
- Investing in projects with a high ROI. Businesses should invest in projects that are expected to generate a high return on investment. This will help to ensure that the business is earning a return on its investments that is greater than its cost of capital.
- Reducing the riskiness of the business. The riskier a business is, the higher its cost of capital will be. Businesses can reduce their riskiness by diversifying their operations, hedging their risks, and maintaining adequate insurance coverage.
Working Capital and Net Working Capital
Working capital is the difference between a company's current assets and its current liabilities. Current assets are assets that can be converted into cash within one year, such as cash, accounts receivable, and inventory. Current liabilities are liabilities that must be paid within one year, such as accounts payable and short-term debt.
Net working capital is working capital minus cash. It is a measure of a company's liquidity, or its ability to meet its short-term obligations.
Strategies Required for Managers Related to Planning for Capital Expenditures
There are two important strategies that managers should follow when planning for capital expenditures:
- Identify and evaluate the needs of the business. Managers should identify the specific needs of the business and evaluate the different options available for meeting those needs. They should also consider the financial impact of each option.
- Develop a capital budgeting plan. Once managers have identified the needs of the business and evaluated the different options available, they should develop a capital budgeting plan. The capital budgeting plan should outline the projects that the business plans to undertake, the amount of money that will be spent on each project, and the expected financial return from each project.
Tradeoff Between Profitability and Risk as They Are Related to Capital
There is a tradeoff between profitability and risk as it relates to capital. The more risky an investment is, the higher the potential return on investment is. However, the riskier an investment is, also means that the more likely it is that the business will lose money on the investment.
When making capital investment decisions, managers must weigh the potential profitability of the investment against the risk of the investment. They should also consider the company's overall risk tolerance.
Conclusion
By understanding the different aspects of capital budgeting and managing the cost of capital, managers can make sound investment decisions that will maximize the profitability of the business.
Sample Answer
Financial Model
A financial model is a tool that businesses use to forecast their future financial performance. It is a spreadsheet that contains a variety of financial data, such as revenue, expenses, assets, and liabilities. The model can be used to simulate different scenarios and to make informed financial decisions.
Financial Projections
Financial projections are estimates of a business's future financial performance. They are based on the business's financial model and on assumptions about the future. Financial projections can be used to develop a budget, to secure funding, and to make strategic decisions.