Expert answer:create a capital plan section 6
Expert answer:For this assignment, you and your group will create a capital plan. Your plan will take into consideration all of the information you know about Universal Parts Company. Additionally, you will make and document any assumptions necessary to plan for UPC’s capital needs. The director of finance has provided you with the following information:UPC will need $100 million in the next 10 years to sustain its growth and remain competitive in its market.UPC’s desired capital structure is 30% debt and 70% equity.UPC will sell its fleet of trucks within the next 12 months. Instead, the company plans to lease trucks for shipping products to customers.Individual Portion:Using course materials and the library, identify 4 sections (or stages) in designing a capital plan for UPC. For instance, you may pick 4 sections in the capital planning cycle. Your group should share the sections in the planning cycle such that the group will cover all of the sections in the cycle.Sections in a capital plan may include the following:Capacity condition evaluation and needs assessmentProject proposal discussions and managementCapital project submissionFinancial analysis of projectsAnalysis of project impact and risksAppropriationsRanking of project options and scenariosProject filtering and accept or reject decisionsAnalysis of capital sources and fundingAllocation of funds among independent or mutually exclusive projectsReview and approval of capital planCapital budget reviews, monitoring, and reportingPlease add your file. Note that only a Word document and Excel spreadsheet (if applicable to your sections) are required for the individual portion.Your assignment will be graded in accordance with the following criteria. Click here to view the grading rubric.Group Portion:Your group will put together all of the responses from individual members and create a complete capital planning cycle for UPC. Submit Excel worksheets for your calculations and a Word document for your discussions.Additionally, include a PowerPoint Presentation of your capital planning cycle.
gp_4_john_jutan_individual_portion_capital_planning.docx
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Runninghead: CAPEX APPRAISAL AND RISK
John Jutan
American Intercontinental University
Unit 4 Group Project – Individual Portion
Capital Planning (FINA320-1704B-01)
December 11, 2017
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CAPEX APPRAISAL AND RISK
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Universal Parts Company (UPC) currently has a capital structure of 40% debt and 60%
equity. The company’s required rate of return on equity is 14% and WAAC is 9.52%. The goal
of the company is to lower its debt and increase its equity financing thereby achieving a capital
structure of 30% debt and 70% equity.
UPC has been successful in raising $15 million from a bond issue and currently has $20
million invested in mutual funds and $5 million invested in stocks. The mutual funds and stocks
have the potential to generate high returns for the company due to the high beta that is associated
with the instruments.
In order to remain competitive in its market, the company has to generate $100 million
over a ten-year period. A part of their strategy for raising additional funds is to sell its fleet of
trucks within 12 months. The cash flow from the sale could potentially be used for the financing
of capital projects.
UPC needs to create a plan to determine the feasibility of implementing any capital
projects during the period that it will be tasked with sustaining its growth amongst its
competitors (Vorster,2012). The following represents twelve elemets that the company should
consider when formulating its capital plan.
1. Capacity condition evaluation and needs assessment
2. Project proposal discussions and management
3. Capital project submission
4. Financial analysis of projects
5. Analysis of project impact and risks
6. Appropriations (Authorizing money for the project)
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CAPEX APPRAISAL AND RISK
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7. Ranking of project options and scenarios
Projects that are being considered by UPC must be ranked in order of the type of return
that is expected from the project. Using the NPV, IRR, and MIRR methods will determine
justification for the projects if the values are greater than the 14% required rate of return on
equity. The Payback period will also help to determine whether or not the project fits into the
organization’s investment strategy (American InterContinental University, 2017).
8. Project filtering and accept or reject decisions
Based on the preferred calculation method that is used (NPV, IRR or MIRR), if the return
is greater than the company’s WAAC of 9.52%, decisions can be made to accept or reject
projects based on whether they are considered independent, mutually exclusive or contingent
projects. If the calculations return a negative value, the projects should not be considered.
9. Analysis of capital sources and funding
UPC has been successful raising capital from investing in mutual funds, stocks and
issuing a $15 million bond. The company can continue with the same investment strategy over
the next 10 years in order to meet the $100 million cash requirement. Adding other high beta
stocks to the existing portfolio and considering additional bond issuances may achieve the goal
and generate excess funds for capital projects.
10. Allocation of funds among independent or mutually exclusive projects
Based on the capital projects that are being considered by UPC, if they are independent,
they all can be accepted if there are enough funds available. If they are mutually exclusive, only
the one (s) with the highest NPV, IRR or MIRR should be accepted. If they are any contingent
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CAPEX APPRAISAL AND RISK
projects, then other determining factors will have to be considered.
11. Review and approval of capital plan
Approval of a capital plan requires a tremendous amount of thought, analysis, decisionmaking, assumptions, probability calculations and scenario analysis. Capital projects should not
create a drain on an organization’s cash flow or liquidity (Vorster,2012). It is therefore essential
that one of the elements of a capital plan include a thorough review by a capital committee and
final approval at the executive level. In today’s technologically advanced world, software using
advanced logarithms is available for assisting with the analysis, compliance requirements and
approval of capital projects (Comindware, n.d.).
12. Capital budget reviews, monitoring, and reporting
Due to the high dollar budget costs that are usually associated with capital projects,
constant review, monitoring and reporting are essential once the budgets have been developed
and approved. Financial accountability is required to create a tracking mechanism to determine
the effectiveness of the project (Government Finance Officers Association, n.d.).
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CAPEX APPRAISAL AND RISK
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References
American InterContinental University. (2017). Learning Materials.[M.U.S.E.].
Retrieved from American InterContinental University Virtual Campus, FINA320-1704B01: https://mycampus.aiu-online.com
Comindware(n.d.). Capex Approval Management. Retrieved from
https://www.comindware.com/capex-approval-management/
Government Finance Officers Association (n.d.). Retrieved from
http://www.gfoa.org/capital-project-monitoring-and-reporting
Vorster, M. (2012). Four steps to building a capex budget. Construction Equipment, Retrieved
from
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