Critical Review
Introduction
Finance is a difficult topic to comprehend. For, finance is packed with many business formulas and tools that business managers use to help them make informed business decisions. Finance includes the cost of capital. Investment decisions generally include the realm of investing in a new branch, buying high-value factory equipment, or Many business managers would use the income statement to determine if their business has been good for the past year or years of operation. A net income is a passing grade for the business manager, production staff, marketing section, and especially the stockholders. The following paragraphs will discuss in detail the book entitled Capital Budgeting: Financial Appraisal of Investment Projects by Don Dayananda, Richard Irons, Steve Harison, John Herbohn, and Patrick Rowland and published by Cambridge University Press in the U.K. in 2002.
Body
A discussion of the author’s main contentions
Historical Merit of the Book
Historically, company managers generally focused on increasing profits. Increasing profits can be done by either increasing sales or decreasing expenses. This book augments and simplifies current corporate financial theory that companies strive to maximize their company’s market value to their shareholders. This is known as the theory of shareholder wealth maximization. The best finance managers normally have to contend with dealing with the company’s optimal capital structure in terms of debt and equity. The basic accounting equation states that the company’s total asset is equal to the sum of its total liabilities and stockholders’ equity amounts (Dayananda et al. 1).
Critical Evaluation of the author’s purpose
The author’s main purpose is to present compulsory business tools that will hasten and improve the finance manager’s decision-making processes. The author explains many formulas or tools that will increase the business manager’s investment decisions in such areas as increasing dividends per share, generating much-needed funds, maximizing assets to increase revenues and net profits. The author starts by discussing the statement of cash flows.
This statement clearly shows the sources of cash inflows. It also shows how these cash inflows were funneled into the company’s different investment opportunities like buying land, factory equipment, paying its rent, and other expenses. The author clearly emphasizes that the main goal of managers is to maximize the market value of their shareholders. The expertly shows that there is a strong relationship between the firm’s overall goal, financial management, and capital budgeting (Dayananda et al. 37).
Thesis Statement
The author believes that the finance manager’s main goal is to increase profits by maximizing the use of the entity’s scarce resources. The finance managers MUST use business tools to make better decisions. These tools are needed to successfully forecast the feasibility of funding its multifarious business activities. Funding comes from borrowing money from creditors and additional cash infusion from its current investors as well as new investors. In this regard, the managers MUST use the capital budgeting tool to determine its return on investments.
Contentions
The author contends that the use of business tools is a must. For, there is a higher probability that money spend on a project will go down the drain if the company does not construct a capital budgeting presentation, use a projected cash flow, balance sheet, and income statement and implement the business tools discussed. The author also persuades its readers that finance managers have to gain adequate knowledge on the topics of project appraisal tools, project analysis tools, sensitivity analysis, breakeven analysis simulation concepts and methods, case study methods, linear programming, financial modeling, property investment analysis, and the analysis of the different risks that each alternative business decision would entail (Dayananda et al. 114).
Methods of analysis
The author uses different methods of analyzing which alternative investment proposal would maximize its assets and increase the company’s net profits. One method is the use of the statement of cash flows clearly shows the different sources of cash funds in a given accounting period. Cash flows are divided into cash flows from day-to-day business operations, financing activities, or investing activities. The cash outflows are then scheduled based on the availability of cash inflows. Another method is the use of sensitivity analysis and breakeven analysis to aid finance managers decided on projects characterized by certainty.
The breakeven analysis clearly shows that the company must strive to generate a minimum sales figure that would pay for the company’s variable expenses as well as the fixed expenses. The author insists that capital budgeting should be done to determine how long it will take the company to generate net profits that would equal the investment of high-value factory equipment, building, and the like.
Another tool that the author uses is the Program evaluation review technique or linear programming to determine the critical path and the slack as the different project paths are harmonized to reach the company’s goals in terms of several days to complete the entire project. The author persists that sensitivity analysis should be exercised to determine the distribution of possible net present values or internal rates of return for a specific project being contemplated by financial managers for implementation (Dayananda et al. 150).
Evaluation of the Author’s presentation of his thesis
The author expertly presented his thesis. The author was right to believe that the finance manager’s main goal is to increase profits by maximizing the use of the entity’s scarce resources. He clearly explains the different financial tools of the trade to drum up support for his thesis. Each business model like the sensitivity analysis, the breakeven analysis, the linear programming formula, or the cash flow statement is explained using simple business language so that a greenhorn business student and a practicing business manager can easily comprehend the author’s intentions. The author clearly and surely discussed each business formula. The various business tools are painstakingly discussed by the author to the increase business manager’s success in implementing the different business tools meticulously discussed.
An explanation of the type of sources the writer utilized
The author exhaustively explains the different types of sources discussed in the book. He uses the excel software of Microsoft to make the different business tools simpler. For, a simpler illustration would suffice to have a higher percentage of being understood by the readers. Excel was used in the discussion of capital budgeting as well as the creation of graphs. The author used other finance and business-related books as a basis for coming up with his book. The examples given could easily be understood by its readers. The author also uses templates to make the study of financial management more enjoyable and time-saving (Dayananda et al. 43).
An assessment of the strong points of the book
There are many strong points of the book. One strong point is the use of excel software to make readers’ computations less tedious. The book explains to the readers the importance of each business tool in making better business decisions. The linear programming discussion can easily be understood resulting in more readers knowing how to compute for the critical path and the slack. The readers will gain the much–needed technique of capital budgeting in their desire to know how long it will take to recover a major investment like buying a building or factory equipment. The cash flow lessons surely will awaken the unlearned business entrepreneur on the importance of the cash inflows as a prerequisite for determining when and where scarce cash resources will be allocated.
Conclusion
How this book changes the way one should think about the subject
The book contributes a lot of wisdom and business acumen to its readers. The book’s contribution to one’s understanding of important issues in the subject that the finance manager’s main goal is to increase profits by maximizing the use of the entity’s scarce resources by the author’s clear and understandable examples cropping up in many pages of the book. These examples increase the readers’ comprehensive ability in the arena of capital budgeting, linear programming, sensitivity analysis, statement of cash flows, and the like.
The reader will acquire adequate knowledge on how to make a statement of cash flows. He or she will be able to learn the importance of the balance sheet and the income statement as the compulsory data to come up with a beautifully crafted statement of cash flows. The reader will learn that sensitivity analysis is just a finance term that is synonymous with interest rates and present value. The reader will realize that he must produce a capital budgeting statement to determine how long it will take to recover the company’s investment.
The stockholders will know that linear programming is a much-needed tool to determine which path is critical and which path can be delayed without affecting the overall completion of each costly project. Conclusively, the book will change the way one will think about the subject that the finance manager’s main goal is to increase profits by maximizing the use of the entity’s scarce resources.
Works Cited
Dayananda, Don, et al. Capital Budgeting: Financial Appraisal of Investment Projects. Cambridge, England: Cambridge University Press, 2002.