Capital Budgeting 1

Capital Budgeting FIN475/Managerial Finance II November 4, 2007

Capital Budgeting 2 Capital Budgeting Capital budgeting is the process of planning the used of an organization investment. In addition, it determines the organizations long-term investments for example new plants, new machinery, replacement machinery, new products, and research and development projects. There are many formal methods to use in capital budgeting, including the techniques such as Net present value, profitability index, internal rate of return, modified internal rate of return, and equivalent annuity. The capital budgeting decision involves the planning of expenditures for a project with a life of at least one year, and usually considerably longer (Block & Hirt 2005). In this assignment team D is to describe the role and importance of capital budgeting. Team D has chosen to use from the virtual organizations Riordan Manufacturing. Riordan Manufacturing is a plastics manufacturer, which they are a global company they employ 550 people they have projected an annual earnings of $46 million. Riordan Industries, a Fortune 1000 enterprise with revenues in excess of $1 billion, own the company. Riordan Manufacturing products include plastic beverage containers, which are produced at there Albany, Georgia, they products custom plastic parts, which are produced at there plant in Pontiac, Michigan, and plastic fan parts, which are produced at there facilities in Hang Zhou, China. The company's does there research and development at there corporate headquarters in San Jose.

Capital Budgeting 3 Riordan Manufacturings operates as a decentralized unit of Riordan Manufacturing in China. It prepares its own electric fan; it has sales throughout the world, which includes the United States. Riordan Industries initial decide to locate there China operations in Hang Zhou, there Chinese partners had facilities already located there and the cities is located near the Qiantang River. Riordan Industries believe that relocation there China operations to the city of Shanghai will result in significant cost savings, this will put there company into a better position to market and ship there Chinese products throughout Asia and Europe. Riordan Manufacturing can invest into property in Shanghai, then build a new plant, and buy new equipment. These investments will save the company money in addition; with the sales going up, they could maintain operations in the second plant in Hang Zhou. By investing in property in Shanghai, this would first place the company into a major shipping port. Once obtaining the property then Riordan Manufacturing can invest by building a new plant on that property. Then Riordan Manufacturing can fill that plant with new equipment thus leaving the plant in Hang Zhou intact able to produce the product they are now producing now this increase the balance sheet of Riordan Industries. Therefore, from a business stand point this will be a good decide.

Capital Budgeting 4 Reference Block, S.B., & Hirt, G.A. (2005). Foundations of Financial Management, 11 th Edition. New York. McGraw-Hill/Irwin