1.a Information needed to analyze the feasibility of acquiring a supplier purchase.
Fully understand the spend category of the supplier
The staff needs to ensure it understands everything about the supplier that is their spend category. If for example the category is corrugated packaging at a consumer products company, the staff will need to understand the definition of the category, their usage patterns and why the particular types and grades were specified.
The staffs need to identify all the stakeholders at all the operating units and physical locations. For example logistics, which may need to know about shipping specifications, or marketing, which may need to understand certain quality or the environmental characteristics.
The total historic expenditure and volumes; expenditure categorized by commodity; expenditure by division, department; expenditure by the supplier; future demand budgets should be analyzed by the staffs so as to have a good view and clarification of the supplier.
The supplier market assessment
Concurrently the staffs should run the supplier market assessment for seeking alternative suppliers to existing incumbents.
Understand the key supplier marketplace dynamics and current trends.
The staffs should prepare “should cost” information from the major components of the key product. To have a view on the key suppliers sub tier marketplace, and analyze for any risks as well as opportunities. Should-cost analysis provides a valuable tool that can drive cost reductions and supplier continuous improvement efforts.
To prepare a supplier survey.
The staff prepares this for both incumbent and potential alternative suppliers so as to evaluate the supplier capabilities, to access the capability and capacity of the market to meet their requirements. Hence this enables assessment at an early stage whether the proposed project is feasible, provides an early warning of requirements to the market and enables the supplier on how to respond. Thus the right suppliers are encouraged with the right structure to respond to EEC.
Building of strategy
The staff to evaluate on how competitive the supplier marketplace is. Staffs with the supplier information can build a competitive landscape in the supply marketplace hence helping demonstrate “the size of prize” to alternative suppliers and communicate the seriousness of the potential sourcing exercise to incumbent suppliers.
On how supportive the organization is testing incumbent supplier relationships. The sourcing team involves the people who use the things bought, and the executives who manage the overall cost. The consumers will accept cost reductions as long as the process is: started in another department; doesn’t mean change in suppliers; and doesn’t jeopardize a good relationship with the supply base.
The executives are the pursuit of cost improvement and user mentality of resting change. To mobilize users and executives support for the category sourcing strategy, all the benefits and overcome any potential risks.
What alternatives exist to competitive assessment? The staffs can harness those forces to leverage better pricing hence useful to set up a collaborative programme that will run until the next competitive sourcing event takes place and if the competitive approach isn’t viable hence the staffs should consider alternatives such as collaborating with suppliers so as to: reduce complexity and increase productivity, create corroborative process improvements, change the structure of the relationship such as new technology or process improvements.
Prepare RFx Request for proposal
The staffs should define and make clear the requirements to all the prequalified suppliers and implement a communication plan to attract maximum supplier interest, ensuring that that the supplier is aware of competing field. Once the RFP is sent to supplier they are given enough time to respond
Selection. This is the staff selection and negotiating with the suppliers, evaluation criteria to the supplier response. If any additional information is required they can enquire, negotiation is conducted first with a larger of suppliers then narrowed to finalists. Staffs should compare outcomes in terms of total value; departments affected can be brought to the final selection process by briefing the senior executives so as to gain approval and given a rationale behind the decision.
Communication with the new supplier. The staffs should invite the supplier to participate in the implementation recommendations. Communication plan is to be developed an important to measure the supplier performance in the first weeks.
2.a DECISION MAKING PROCESS IN CAPITAL BUDGETING DECISIONS.
Brainstorming. Investment ideas can come from anywhere that’s from topor bottom of organization from any department financial area or the a whole company
Project analysis. Gathering information to forecast cash flows for each project then evaluating project profitably.
Planning. Company must organize profitable proposals into a coordinated whole that fits within the company’s strategies and projects timing
Performance monitoring. In a post-audit, actual results are compared to plant or predicted results and any difference must be explained .post auditing capital helps in monitoring the focus and the underlay capital budgeting process.
2.b Techniques used in capital budgeting decisions
Payback period. It is very intuitive and easy to calculate, the amount of time until the initial investment is removed i.e. a project cost a 100 dollars and we own 20 dollars(after tax) a year we will have our 100 dollars in 5 years.
Net present value. This calculation of time value money and also used to value stocks and bonds. Discounting of all the cash flows for an investment to the present, adding inflows and subtracting outflows. The larger the NPV the more the financial value the project adds to the company. It gives the project amount of value that a project will add to the EEC. I.e. if the NPV is less than zero reject the project.
Internal rate of return. It is the return we will receive on the life of our investment, calculated at a discount rate I which the NPV is equal to zero. The rate that makes the present value of cash flows is equal to initial investment. If the rate we earn is more than the rate it cost us then we should undertake the project as it adds to corporate value if less than what it cost us then the project subtracts from the project value. If IRR is greater than the cost of capital one should undertake the project.
If IRR is greater than the cost f capital (IRR>WACC) accept, if IRR is less than the cost of capital (IRR<WACC) reject
3.a HOW TIME VALUE OF MONEY AFFECTS CAPITAL BUDGETING
Time value of money helps small business to adjust cash flows for the passage of time .It also helps in understanding some common capital budgeting techniques that use the time value of money can help understand why these project is important. Time value of money helps the NPV to determine whether a project is profitable after adjusting for the time of money. This process known as discounting to present value ,occurs for the preference of the dollars received today and dollars received tomorrow.
3.b WHY EEC COMPANY SHOULD USE CAPITAL BUDGETING
EEC company should use the capital budgeting .
EEC will use capital budgeting to support growth or to replace odd assets ,use of capital budgets to plan what, when and how to find these investments for capitalizing some large expenses. It is also used to raise large sums of money to invest in long –term assets, it usually exceeds one year ,often spinning two or more fiscal years often where regular organizations covers one fiscal year. Capital budgeting helps to develop strategies goals i.e being aware of year available resources and potential needs is paramount to success. Capital budgeting facilitates communication streamlined across all departments and within teams creates transparency ,accountability and discretion. Capital budgeting is used to justify decisions, it maybe an ordinary band or superintend or c-level leader who must approve decisions to have a means of delivering finance ,resource and needs to enable appropriate decision making process for category projects as acceptable and unacceptable.
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