Superior key issues
Because projects can vary in size the capital expenditures can impact Superior Livings financial performance of the firm, when looking at the project the most important thing that a firm is interested in is capital budgeting.
Many shareholders may want the firm to select projects that show that they have positive cash flow, and some shareholders may just be interested in the long-term growth (“Capital Budgeting”, 2000-2010, p. 1). With this said there are many different ways in which we can find a solution that would best fit Shareholder’s needs.
Capital projects maximize a firm’s value that result in positive NPV, the present value of the expected cash inflows less the present value of the required capital expenditures. When we use the NPV in order to measure the capital budgeting, we can see that it would involve selecting only those projects where they can increase the value of the firm, because they have shown a positive NPV.
The timing and the growth rate of Superior Livings incoming cash flow is important only to extent of its impact on the NPV(“Capital Budgeting”, 2000-2010, p. 1).
Capital projects can impact a firm’s stock market of a corporation’s stock price, because of the amount of the project. If the market gets concerned about the amount of the project then the stock will not go well and the stock price will suffer, but in our case because we have the funds to go ahead with the project then I can see that the stock market price will soar in the market. This will make shareholders happy and it will also indicate that the new project will increase in value over time (Faille, January 17, 2011, p. 1).
Superior’s project has a large expenditure of cash that will increase the productivity of our company. Example another furniture company could attempt to lower the associated cost by leasing much of their furniture. On average, they own roughly one-third of the furniture, and they would then lease the rest.
A catastrophe event with the company could push the company into insolvency if it has tied up its capital in such a large project. For example, in 2003, a disease called Severe Acute Respiratory Syndrome affected both the Far East and Canada. It devastated Canadian air travel, and Air Canada had to file for bankruptcy (Faille, January 17, 2011, p. 1).
Success is when the market reacts in a positive way to major capital projects; this would include projects that have some difficulties.
Strategic direction of the organization must conduct long and short term planning. Senior leaders must determine the strategic direction of the company, and they must express it in a written report on what the company’s goals are. Part of their planning for the future includes funding expensive projects, or capital projects costing more than $10,000. For example, new building construction is a type of capital project.
Superior’s financial strategy must be able to achieve all of its goals when creating new projects, having the appropriate amount of funds or the budget to be able to set funds aside for future projects, so that it will be able to pay for building projects and any other large expenses they might incur.
A capital project fits the strategic direction of the organization if projects funded will help achieve goals (Bianca, June 09, 2011, p. 1).
Bianca, . ( June 09, 2011). How Capital Projects should fit with the strategic direction of the organization. Retrieved from http://www.ehow.com/info_8571058_capital-fit-strategic-direction-organization.html
Capital Budgeting. (2000-2010). Retrieved from http://www.netmba.com/finance/capital/budgeting/
Faille, C. (January 17, 2011). How Major Capital Projects can Impact a Firms Stock Market Valuation. Retrieved from http://www.ehow.com/info_7796258_major-firms-stock-market-valuation.html