Capital Budgeting: Debt Management

| July 18, 2015

 

 

Capital Budgeting: Debt Management

Name

Institution

 

 

 

Introduction

There are several approaches towards financing projects. There are instances where borrowing is not an option. The management of any developing site has to establish different measures for gathering resources and making sure that the project does not incur too much debt. Private investors are not likely to find a provision where they can borrow funds in the absence of a crucial form of collateral (Howell-Moroney & Hall, 2011). However, there are cases where financing could lead to more demerits than merits in the context of investment and capital budgeting. The most important thing to do is to make sure that the option of financing opted for conquers with the objective of the investment or project. It should also concur with the feasibility to resettle the debt. The debt management option should be appropriate and reasonable.

The case of developing a new school or expanding the already existing class calls for an analysis of the financing options available. The first one is the pay-as-you-go financing. The second one is the pay-as-you-use approach. Each of the methods has its benefits and drawbacks respectively. The project for the schools is imperative. It requires that financial management decision be taken seriously.

There are benefits of the pay-as-you-go method of financing. First, the debt gets cleared from an instant note. That is; the approach does not result into any form of debt or bad debt. The financier finds that the project proprietors are responsible with regards to the financial management (Howell-Moroney & Hall, 2011). In addition, there are no additional costs such as interest charges. The additional cost of debt that debt borrowing brings about does not feature in such an instance.

However, there are some professionally affiliated drawbacks. First, the method facilitates the acquisition of very minimal capital assets. In addition, the method does not offer a chance for growth in value and substance of equity. Finally, the method does not provide an opportunity for the financial proprietors to account for the better year to year trends in financial stability. In fact, the level of expenditures depletes on an annual basis.

Alternatively, there is the pay-as-you-use approach. This approach favors those who do not have a stable financial platform for investment. It allows the costs to diverse over an extended period. The level revenues do not fluctuate in an immediate manner. The growth in the value of equity stabilizes due to the spread of expenses.  However, there exist drawbacks to this approach. First, this method incorporates additional costs. Thus, the ratio of usefulness and the finance acquired is unreasonable. Secondly, there are fluctuations in the financial trends. Therefore, there is a high level of unpredictability.

Recommendation

The development of the school is a non-profit making venture. Therefore, the concern of the finance director and the panel should not focus on the economic stability. However, it should concentrate on the feasibility of minimizing the costs and at the same time succeed in facilitating the project. Therefore, the best approach is the pay-as-you-use for this project. It will be a better option, especially because the project does not have a fixed amount that it can use to facilitate the construction of the new school. It is at the discretion of the director of the finance department to absorb or argue out this proposal in favor of the other proponent approach. The pay as you use approach means that the project will exhibit making payments with regards to the periods stipulated in the agreement (Howell-Moroney & Hall, 2011).

 

School Finance
Cash Budget
For the Year Ending December 30, 2015
 
  Quarter  
  1 2 3 4 Year
Beginning Cash Balance $52,000 $50,000 $50,000 $110,740 $50,200
Add: Budgeted Cash Receipts: 37,150 54,190 53,730 62,300 207,370
Total Cash Available for construction $89,150 $104,190 $103,730 $173,040 $250,570
Less: Cash Disbursements          
Direct Material 14,960 16,550 16,810 19,410 67,730
Direct Labor 8,830 9,610 9,750 11,900 40,090
Schools Overhead 10,020 10,400 11,000 11,780 43,200
Selling and Admin. Expenses 7,640 8,360 8,500 9,610 34,110
Equipment Purchases   6,000   14,000 20,000
Total Disbursements $41,450 $50,920 $46,060 $66,700 $205,130
Cash Surplus/(Deficit) $47,700 $53,270 $57,670 $106,340 $45,440
Financing:          
Borrowing 41,000       40,000
Repayments   −3,188 −912   −4,000
Interest   −82 −18   −100
Net Cash from Financing  
Budgeted Ending Cash Balance

The choice of financing through the pay, as you use, means that the payments get made in the form of installments. The cash budget stipulated above is a projection of what the project proprietors intends to utilization in the project. The project incorporates a series of expenses that have to get financed. It is not easy to predict the ultimate value of the project cash gathered from the financing. For instance, the project intends to utilize other forms of finances in addition to the already acquired funds from possible philanthropists. There are several channels of expenses within the project.

The financing channel used in the project allows the investors to make payments in periodic terms. It is easier to pay in the form of installments than it is to pay in ransom. Otherwise, application of the pay, as you go mainly, applies for the private investors.

 

 

 

References

Howell-Moroney, M. E., & Hall, J. L. (2011). Waste in the Sewer: The Collapse of Accountability and Transparency in Public Finance in Jefferson County, Alabama. Spotlight on Critical Grassroots Public Administration Issues.

 

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