Capital Investment

For the purpose of this assignment, a project is defined as any endeavor that had a capital outlay.

Pick a project you have recently completed or one you would like to complete in the near future. This could be a project in your home, place of work, or even church or other organization with which you are familiar. Respond to the prompts below.

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Introduce your project with a reflection on the importance of selecting the right projects in which to invest capital. Do we always select those projects that have the highest return on investment (ROI)?
Describe the relationship between risk and return and how you would measure for both in your project. What other factors play into capital budgeting decisions?
Explain how you would calculate the weighted average cost of capital (WACC) and its components for your project.

Your essay should be at least two pages in length, not counting the title and reference pages. Use APA format to cite in-text and reference citations.

Sample Answer

 

Capital Investment

A project is one of the things that we tend to undertake with the intention of either improving the quality of a product or service or simply making a profit. The project that I will be undertaking in the near future is increasing the working space in the workplace to provide privacy and comfort to all employees. The decision to select this project has been motivated by the desire to see all the employees work more efficiently which is likely to increase performance and increase retention. The importance of selecting the right projects in which to invest capital is vital especially in the work environment because the company wants to realize profitability in the long run. For instance, for a company, the right project selection is done by ensuring it is safe, beneficial, and can yield good returns. The selection of the right project will play a significant part in transforming the business and avoiding poor results, wasted effort, and resources.

The choice of a project can be influenced by the return on investment based on the company’s strategic goals and objectives. For example, a company might choose a project with a quick ROI while another might choose a project that ensures long-term growth. Therefore, a project such as increasing the office space is a long-term ROI strategy because it is aimed at motivating the employees to increase performance and productivity by providing them with good working conditions. Despite whether a company picks a project for a short-term or long-term goal the most important thing is to pick the project at the right time.

Risk and return greatly correlate when it comes to capital investment and project selection because they determine if the move will be profitable or incur losses. Capital investment involves risks that either can return investment value or not. According to the risk-reward tradeoff principle “Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return” (The Library of Economics and Liberty, n.d). Therefore, a project that has higher risk is likely to lead to greater ROI or incur massive losses depending on whether it will succeed or fail. For the office expansion project that I will be undertaking in the future, I will measure using the Sharpe ratio because it will be effective in showing how much of the investment reward the company gets given the amount of risk taken. The cash flow statement is another factor that plays a part in capital budgeting decisions because it helps a company in identifying the right time that it can make pick a particular project. The competitive strategy also is imperative in capital budgeting decisions because it helps the company stay competitive by buying new or high-capacity equipment and machinery to match those of its competitors.

The project weighted average cost of capital will be calculated using the main steps starting with the cost of capital components, Capital structure, and Weighting of the components. Firstly, the cost of capital components will involve the multiplication of debt capital and equity capital by their relevant weight based on the market value. The next step will be to calculate the capital structure which involves calculating the proportion that each capital source using the market values of debt and equity in reflecting the investments that the company expects to earn a minimum return. The last step will be weighing the components which involve weighting “…the cost of each kind of capital by the proportion that each contributes to the entire capital structure” (New York University, n.d). Therefore, in the project, the cost of capital components renting an extra room to build more rooms for the employees will be calculated based on the cost of each capital source in the company in relation to the market value by adding the products required in determining the total cost.

 

 

References

New York University. (n.d.). The Weighted Average Cost of Capital. Welcome to Pages at the Stern School of Business, New York University. https://pages.stern.nyu.edu/~igiddy/articles/wacc_tutorial.pdf

The Library of Economics and Liberty. (2018, October 19). Risk and return. Econlib. https://www.econlib.org/library/Topics/College/riskandreturn.html

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