Running Head: FACTORS IN CAPITAL 1

Factors in Capital

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FACTORS IN CAPITAL 2

Factors in Capital

1) In addition to quantitative factors and benchmarks, many qualitative factors also need

to be considered while making the decision to buy the new computer network system.

These factors are related to the training needs for the new computer network system and

how much time and effort will be required to train the employees for the new system, any down

time that may arise due to the change in system, acceptance or resistance levels for the new

system and any effect on the company culture.

2) The above factors can be very important to the smooth functioning of the company.

Employees are one of the most important stakeholders in our organization and any disruption

towards their smooth working can be problematic.

3) Some of the criteria to take the capital budgeting decision are based on Net Present

Value (NPV), Internal Rate of Return (IRR) and Payback Period (PB).

NPV is related to the dollar amount of return, IRR is related to the rate of return for zero

NPV and PB is related to the time in which the cost is recovered. This capital budgeting

decision is a replacement related decision where the rate of return is more important than the

dollar amount of return. This makes IRR a more suitable criteria as compared to NPV and PB.

4) The net profit of Facebook last year was $15.23 billion. The cost of the new system is

10% of that amount, i.e. $1.52 billion. Assuming that the revenue increases by the last 3 year

CAGR of around 40% and the reduction in time between order and delivery increases the

operating margin by 2 percentage points for a useful life of 5 years, the IRR comes to 54.8%.

This is the hurdle return on investment for the project. While this may seem very high, it is

justified as the company has been growing at 51.53% in the last five years with net profits

increasing by 246%.