After reading the unit lesson and textbook chapters, discuss how a firm can add value by combining traditional capital budgeting techniques with an alternative strategy and consider sustainable capital. Your paper should synthesize at least one alternative technique into the capital budgeting process. Justify how this technique creates value in an organization.
? Your case study should be at least two pages in length, double-spaced.
? Use a minimum of three scholarly articles, in addition to the textbook, from the CSU Online Library, or other scholarly sources to support your work.
? In-text citations and reference page must be properly formatted using APA style guidelines.
? An abstract is not required.
? Reference and title pages do not count towards the minimum page requirement.
Here is the case study:
Benjamin Sharpe successfully built his commercial real estate business by investing in
undervalued properties. Sharpe relied on traditional capital budgeting measures like
net present value (NPV), internal rate of return (IRR), profitability index (PI), an
payback to evaluate real estate investments. Especially when Sharpe first started his
business, he found sources of capital were limited and had to ration capital amongst
the best opportunities determined by traditional capital budgeting methods.
arpe’s business grew, he developed alternative sources of capital and could rely
more on outside capital sources to grow his business. For example, Sharpe
established a credit line with his bank, built relationships with other commercial real
ors, and had a solid financial track record he could take to the bond and
stock markets to raise capital.
Besides building greater access to capital, Sharpe believed opportunities existed in
the market he could only take advantage of if he made an investm
ent in them. Only
with time would these opportunities come more clearly into focus. Sharpe knew also if
he did not invest in these opportunities early on he could lose the opportunity to reap
the rewards from them.
Because of the uncertain possibilities,
Sharpe believed he could reshape the capital
budgeting process in his company to consider all potential opportunities instead of
losing some of them. Sharpe asked Milton Muller, his chief financial officer, to revisit
the capital budgeting process to consi
der these uncertain projects.
Armed with this directive from Sharpe, Muller started to explore other ways to evaluate
projects that would consider those highly uncertain ones that could materialize down
the road. Muller belonged to a financial officers gr
oup and decided to see what some
other chief financial officers used to evaluate uncertain projects and include them in
Meanwhile, Sharpe observed the financial recovery saw more people starting to move
to the city because of the cost of commuti
ng and the lack of jobs in suburban areas.
Businesses also expressed a preference to locate in urban areas for a more stable
labor supply and a more central location. Urban areas had a higher concentration of
space and many existing buildings either needed
renovation and rebuilding or major
remodeling. Sharpe clearly needed a new plan to take advantage of these trends.
Despite his reliance on traditional capital budgeting methods, Muller kept an open
mind about exploring new ways to evaluate projects and a
dd value to the firm. Muller
learned other companies used some other methods to evaluate projects and consider
some of the more uncertain opportunities. For example, Muller learned more about
other techniques such as real options, decision trees, and Monte
Carlo analysis from
his financial officer’s group.
Capital budgeting is the most important aspect for any business, as it lays down the
foundation for the future of the company and sets the base for the company. Capital of the
business is the most…