University of Technology and Applied Science

Business Studies Department

Course: BAFI3301|Project Appraisal
Reflective Essay
on Capital Budgeting Techniques in Kuwait
Student Name Student ID
Section No. Total Grad / Seven

According to the literature review, discuss briefly what are the Maxi.
One
factors that affect the choice of capital budgeting techniques Words: 50
Mark
(explain with an example) Words

Simplicity, cost, time, nature of projects under appraisal, and

familiarity of the staff on specific capital budgeting techniques
determine which method to use in carrying out project appraisal.
Profitability Index and IRR often require some level of knowledge
before adopting them. NPV is frequent since it is simple to use.

Discuss how the use of project appraisal techniques differs Maxi.

One
according to the characteristics of a corporation? (explain with Words: 50
Mark
an example) Words

The corporation's characteristics such as opportunities for growth,

age, CEOs' educational qualifications, leverage, liquidity, and
profitability determine use of specific appraisal techniques.
Methods like IRR are frequently used by companies having lower
leverage and lower profitability based on growth rate. NPV is best
used in companies with higher growth rates.

Based on the result of the study, explain briefly what is the Maxi.
One
major obstacle of adopting capital budgeting techniques and Words: 50
Mark
explain how this obstacle could be treated? Words

The absence of data and uncertainties concerning the outcome of

some capital budgeting techniques are the primary obstacle of
adopting capital budgeting techniques. Since this obstacle is related
to a lack of information, the company needs to invest in emerging
technologies, research, and development to identify information on
various projects.

If you got a similar chance to conduct a research on Capital One Maxi.

Budgeting in Oman, what would be your research topic? [hint:
Words: 50
which topic you will investigate and why] Mark
Words

I will research Oman's capital budgeting practices to identify the

best technique that can add maximum value to Oman. Due to the
volatility of global oil prices, Oman will diversify its economy by
investing in other projects that will give the country the best
outcomes over a more extended period.

Mwasalat Company wants to renovate one of its existing buses at Three Maxi.
cost of OMR 200,000 and the Company will incur a repair cost of Marks Words: 40
OMR 20,000 at the end of 3 rd year from now. If these costs are Words
incurred, the bus will be useful for 6 years. After a 6-year period, it
will be sold at a salvage value of OMR 30,000. The total annual
revenues of the bus will be OMR 260,000 and the total cost to
operate the bus will be OMR 170,000 per year.

Alternatively, Mwasalat Company can purchase a new bus for

OMR 190,000. The new bus will require some repairs at the end of
the 6-year period at a cost of OMR15,000. Its salvage value will be
OMR 40,000 after its useful life of 6 years. The total annual
revenues of the new bus will be OMR 220,000 and its operating
cost will be OMR 130,000 per year.

The company’s required rate of return is 15% before taxes.

Required:
A. Should Mwasalat Company renovate the old bus or
purchase a new bus? Justify your answer.

Mwasalat should purchase a new bus rather than renovating the old
bus. Company Limited. This is because it has a greater NPV of
$161,412 than renovating the old bus, which has an NPV of
$133,848.

B. Would the above decision of Mwasalat Company will

change if an specific inflation is the expected for annual
operating cost of new buses only at rate 3% every year?
Justify your answer.

The decision will not change since the inflation rate is applicable on
both options and will only affect the project's operating costs.
Operating costs related to both purchasing or renovating ware
subjected to 3% inflation.
 C. Based on the above article, what are limitation of
adopting NPV as capital budgeting techniques?

The primary limitation of NPV as a capital budgeting tool is

guessing the projects' future cash flows and the company's cost of
capital. Besides, it can be challenging to arrive at a discounting rate
reflecting its actual risk premium.

THE END