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Capital Budgeting Process Evaluation of Capital budgeting project involves six steps:

First, the cost of that particular project must be known. Second, estimates the expected cash out flows from the project, including residual value of the asset at the end of its useful life. Third, riskiness of the cash flows must be estimated. This requires information about the probability distribution of the cash outflows. Based on projects riskiness, Management find outs the cost of capital at which the cash out flows should be discounted. Next determine the present value of expected cash flows. Finally, compare the present value of expected cash flows with the required outlay. If the present value of the cash flows is greater than the cost, the project should be taken. Otherwise, it should be rejected.

Definition for system simulation:

Web definitions: System Simulation (SSL) is a software engineering company specialising in text and multimedia information systems, based in Covent...

Definition for super profits:

Web definitions: Net profit less the opportunity costs of alternative earnings and alternative returns on capital invested that have been foregone..

Superprofit (or surplus profit or extra surplus-value; in German: extra-Mehrwert), is a concept in Karl Marx's critique of political economy, subsequently elaborated by Lenin and other Marxist thinkers

Definition of 'Reorganization'
A process designed to revive a financially troubled or bankrupt firm. A reorganization involves the restatement of assets and liabilities, as well as holding talks with creditors in order to make

arrangements for maintaining repayments.

Investopedia explains 'Reorganization'

Reorganization is an attempt to extend the life of a company facing bankruptcy through special arrangements and restructuring in order to minimize the possibility of past situations reoccurring.

Costvolumeprofit analysis
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Costvolumeprofit (CVP), in managerial economics is a form of cost accounting. It is a simplified model, useful for elementary instruction and for short-run decisions. CVP analysis expands the use of information provided by breakeven analysis. A critical part of CVP analysis is the point where total revenues equal total costs (both fixed and variable costs). At this break-even point, a company will experience no income or loss. This breakeven point can be an initial examination that precedes more detailed CVP analysis.

Definition for reorganization:

Web definitions: the imposition of a new organization; organizing differently (often involving extensive and drastic changes); "a committee was...

Definition for break even point:

Web definitions: Break-even (or break even) is a point where any difference between plus or minus or equivalent changes side..

Definition for liquidation value:

Web definitions: Liquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its...

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Liquidation Value
Filed Under Accounting , Business , Venture Capital

Definition of 'Liquidation Value'

The total worth of a company's physical assets when it goes out of business or if it were to go out of business. Liquidation value is determined by assets such as the real estate, fixtures, equipment and inventory a company owns. Intangible assets are not included in a company's liquidation value. Intangible assets include a business's intellectual property, goodwill and brand recognition.

Investopedia explains 'Liquidation Value'

If a company were to be sold rather than liquidated, both liquidation value and intangible assets would be considered to determine the company's going-concern value. Value investors will look at the difference between a company's market capitalization and its going-concern value to determine whether the company's stock is currently a good buy.

Liquidation value can also refer to the cash value of a single asset.

Noun: 1. The state of being bankrupt: "many companies were facing bankruptcy"; "bankruptcy proceedings". 2. The state of being completely lacking in a particular quality or value: "the moral bankruptcy of terrorism".

Filed Under Banking , Personal Finance

Definition of 'Bankruptcy'
A legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). All of the debtor's assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.

Investopedia explains 'Bankruptcy'

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply can't be paid while offering creditors a chance to obtain some measure of repayment based on what assets are available. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses another chance and providing creditors with a measure of debt repayment. Bankruptcy filings in the United States can fall under one of several chapters of the Bankruptcy Code, such as Chapter 7 (which involves liquidation of assets), Chapter 11 (company or individual "reorganizations") and Chapter 13 (debt repayment with lowered debt covenants or payment plans). Bankruptcy filing specifications vary widely among different countries, leading to higher and lower filing rates depending on how easily a person or company can complete the process.

Definition for technical insolvency:

Web definitions: Default on a legal obligation of the firm. Technical insolvency occurs when a firm doesn't pay a bill on time..

Technical Bankruptcy The state of a person or company that has defaulted on a liability and lacks the ability to pay it, but has not yet filed for bankruptcy or been declared bankrupt by a court.

Break Even Analysis Break Even Analysis The break Even analysis (BEA) indicates at what level total costs and total revenue are in equilibrium. It is an analytical technique that is used to identify the level of output and sales volume at which the firm breaks-even i.e. the revenues are sufficient to cover all costs.

BEA establishes the relationship among fixed and variable costs of production, value of output, sales value and profit. It is hence, also known as Cost Volume Project (CVP) analysis. Three approaches are commonly used to solve the BE problems. They are; the graphical method, the equation method and the contribution margin method. We are going to discuss them in this chapter. The Graphical Method or Break Even Chart When the BEA is represented graphically, it is shown as the break even chart. The BEC shows the relationship of production costs and revenue to the volume of output. This relationship is determined by a BEP on a graph. The BEP is a specific level of output or volume of sales where total revenue and total costs of a firm are equal. It is the point of zero profit. This point is also known as no-profit, no loss or profit beginning point.

The graph represents a break even chart where the level of output is measured along the horizontal axis and revenue and costs on the vertical axis. The total revenue curve TR is drawn as a straight line, assuming that every level of output is sold at the same price. The fixed cost curve FC is drawn parallel to the horizontal axis. The variable costs are assumed as constant so that the total cost curve TC is also linear. The point of equality B of TR and TC curves is the break even point. B is the point of noprofit no-loss at OQ level of output. When the firm expands its output beyond OQ, it starts making profit. Thus the area to the right of point B is the profit zone. When the firms output falls below the OQ level, it incurs loss. So the area to the left of point B is the loss zone. Margin of Safety This type of BEA can be used to calculate the level of sales which most be attained to avoid less or to calculate the margin of safety MS. MS is the difference between the firms actual level of sales and sales at the BE point as represented in the above diagram. It is expressed as MS = Actual sales revenue BE sales. Nevertheless, firms compute the MS in terms of ratio are:

MS Ratio =

MS Actual Sales

The MS is an indicator of the strength of a firm. If the margin is large, it represents that the firm can make profit even it has to face difficulties. On the other hand, if the margin is small, a small reduction in sales can lead to loss. MS is nil at the point BE point for the reason that actual sales volume is equal to the cost. The Equation Method The same results can be arrived at by the equation method: Profit Where TR TVC = = = TR TVC TFC Price x Quantity AVC x Quantity

TFC is a constant BE point is where profit = 0 And 0 = (Price x Quantity) (AVC x Quantity) TFC Rearranging the above equation: BE Quantity = TFC Price AVC

The capital budgeting process is the process of identifying and evaluating capital projects, that is, projects where the cash flow to the firm will be received over a period longer than a year. Any corporate decisions with an impact on future earnings can be examined using this framework. Decisions about whether to buy a new machine, expand business in another geographic area, move the corporate headquarters to Cleveland, or replace a delivery truck, to name a few, can be examined using a capital budgeting analysis. For a number of good reasons, capital budgeting may be the most important responsibility that a financial manager has. First, since a capital budgeting decision often involves the purchase of costly long-term assets with lives of many years, the decisions made may determine the future success of the firm. Second, the principles underlying the capital budgeting process also apply to other corporate decisions, such as working capital management and making strategic mergers and acquisitions. Finally, making good capital budgeting decisions is consistent with management's primary goal of maximizing shareholder value. The capital budgeting process has four administrative steps:

Step 1: Idea generation. The most important step in the capital budgeting process is generating good project ideas. Ideas can come from a number of sources including senior management, functional divisions, employees, or outside the company. Step 2: Analyzing project proposals. Since the decision to accept or reject a capital project is based on the project's expected future cash flows, a cash flow forecast must be made for each project to determine its expected profitability. Step 3: Create the firm-wide capital budget. Firms must prioritize profitable projects according to the timing of the project's cash flows, available company resources, and the company's overall strategic plan. Many projects that are attractive individually may not make sense strategically. Step 4: Monitoring decisions and conducting a post-audit. It is important to follow up on all capital budgeting decisions. An analyst should compare the actual results to the projected results, and project managers should explain why projections did or did not match actual performance. Since the capital budgeting process is only as good as the estimates of the inputs into the model used to forecast cash flows, a post-audit should be used to identify systematic errors in the forcasting process and improve company operations. There are two basic types of bankruptcy: liquidation and reorganization. Chapter 7 falls into the liquidation category. It is referred to as a liquidation bankruptcy because any of your property that isnt exempt can be sold (liquidated) and the proceeds used to pay back your creditors. Chapter 13 is a reorganization bankruptcy. Under a Chapter 13 bankruptcy, you get to keep all of your property. Rather than wiping out your debts completely, a Chapter 13 bankruptcy reorganizes your debts, and a monthly payment plan is created by which you repay all or some of your debt over the course of 3 to 5 years. Whether liquidation or reorganization bankruptcy is right for you depends on your financial situation and other individual circumstances. An experienced Texas bankruptcy attorney can advise you on the most beneficial course of action.

Lease Notes By Jim Mahar Lessee: party who uses the property (Tenant) Lessor: Person who owns the property

Types of leases: 1. Operating Lease (also called Service Lease)

Generally for a shorter term than the asset's useful life Maintenance is the responsibility of the lessor Commonly have a cancellation clause which shifts risk back to lessor 2. Financial Lease (or Capital Lease) is generally non-cancellable and for a longer duration than an operating lease. Payments are set to fully amortize the lessor's costs. -generally all maintenance must be provided by the Lessee. Example airlines lease their planes, but the airlines must maintain the planes. - lease is generally approaching the useful life of the asset

Types of Financial Leases Sale and lease back-Special type of Financial lease, assets owned by A are sold to lessor and then leased back to A.

This is similar to a direct lease except here A does not originally own the asset, but agreed in advance to lease the asset if lessor could purchase it elsewhere.

Leveraged lease: The lessor finances the asset predominantly with debt. The lendor gets first lien on the asset and in teh event of a default, the lender takes teh lease payments directly.