Capital Budgeting
Introduction
Walmart is the largest retail company that is founded by Sam Walton in the mid of 1962. According to the annual report of 2021, the total employees that work in Walmart are 2.3 million. Walmart enables people all over the globe to save finances as well as lead happy lives by allowing them to shop online as well as in retail stores. The company seeks to constantly enhance customer satisfaction that works seamlessly with the firm retail stores as well as in an omnichannel providing that saves patrons time via innovation (Report, 2021). Every week, the organization provides over two hundred and forty million patrons who visit roughly eleven thousand, and four hundred stores as well as multiple eCommerce sites in twenty-six states under fifty-four banners. In this report, we will do a capital-budgeting analysis and determine whether Walmart should invest its money in purchasing new assets. The three methods that will employ in capital budgeting evaluation are net-present value, payback period and the rate of return.
Net-Present-Value
Any investment entails a preliminary cash-outflow to charge for it, accompanied by a combination of funds-inflows in the manifestation of income or a decrease in current cash flows due to incurred expenses. The conventional approach to assessing capital propositions is net-present-value because it is premised on a singular factor – cash-flows – which could be utilized to evaluate any proposal coming from any place in a corporation (Knoke, Gosling, & Paul, 2020). Walmart wants to invest its money in purchasing a new asset for the company. When the NPV of any is negative then it means a project or investment is not beneficial for the company and the company does not need to invest its capital in the particular project. On the other side, if the NPV of any project is one or greater than one then that means the company should invest its capital in that particular project because that shows the company can earn profit from that investment (Arshad, 2012). The total investment required for purchasing an asset is 10 percent of property, plant & equipment, which is equal to 9,220 million dollars. However, the cash-flows are 1,213.21 million dollars. The result of NPV is 1989.66 million dollars, which means Walmart should invest its capital in purchasing the asset because it is beneficial for the company, and after the sometimes company will make a profit from its investment.
Accounting-Rate-of-Return
ARR refers to the anticipated proportion of return/investment on an asset or investment in comparison to the preliminary invested cost. It is generally utilized to create investment choices. Accounting-Rate-of-Return is among the greatest methods for calculating the probable profit margins of a capital invested, creating it a useful tool for deciding which investment, asset, or long-term plan to spend in (Warren & Jack, 2018). For instance, if a firm wants to choose whether it should invest in a particular project, the calculation of ARR allows the company to decide whether investing in a particular project or asset is beneficial for the company or not. For calculating the ARR, to begin with, we subtracted the value of depreciation expense by the cash flow, then we divide it by the investment cost of the asset. The value of accounting-rate-of-return is 8.99 percent. That means, for every dollar that Walmart invests in purchasing the new asset, it will get 8.99 dollars in return, which is quite beneficial for the company.
Payback Period
The payback-period refers to the amount-of-time a project need to regain the investment cost. In simple terms, it refers to the time required for an investment to reach its breakeven point. Corporations as well as people actually invest primarily to be paid back, hence this is the key reason that the payback has become so critical (Mahlia, Razak, & Nursahida, 2011). In essentially, the narrower the payback period of an investment, the much more appealing this becomes. Deciding the payback time is helpful for anyone (corporations or individual investors alike) as well as can be accomplished by dividing the original investment of the project by the average-net-cash-flows. It is calculated by dividing the initial investment of the project by cash flows (Wan, Xia, & Zhu, 2020). The initial investment is 9220.10 million dollars and the cash flow is 1213.20 million dollars, the value that we get after the analysis is 7.5997 years. That means, if Walmart invests its capital on purchasing the new assets then they invest will take more than seven years to reach its point of breakeven. In other words, after approximately seven years and seven months, the company will get profit from the investment-cost. Payback-period outcome that Walmart should invest its capital in purchasing the new assets because, after seven years and seven months, it will start earning a profit on the new assets.
Conclusion
To sum up, Walmart is a retail company that is operating its stores in several countries. The purpose of the analysis is to determine whether it is beneficial for Walmart to invest its capital in purchasing new assets for the company. Three methods that are utilized for the capital-budgeting evaluation are payback-period, NPV as well as ARR. The NPV of Walmart for investing in the new asset is 1989.66 million dollars which are positive, secondly, the payback period of the project is seven years and seven months. However, the accounting-rate-of-return of the investment is 8.99 percent. As company’s NPV value is positive and ARR is higher than 7 percent that means Walmart will get profit from this investment. In other words, Walmart should invest its capital in purchasing the new plant-assets because new assets will help the company in generating more return as well as profit.
References Arshad, A. (2012). Net present value is better than internal rate of return. Interdisciplinary journal of contemporary research in business , 211-219. Knoke, T., Gosling, E., & Paul, C. (2020). Use and misuse of the net present value in environmental studies. Ecological Economics. Mahlia, T. M., Razak, H., & Nursahida, M. (2011). Life cycle cost analysis and payback period of lighting retrofit at the University of Malaya. Renewable and Sustainable Energy , 1125-1132. Report, A. (2021). Walmart Inc. Form 10-K, 6-82. Wan, J., Xia, Z.-h., & Zhu, X.-p. (2020). Investment Payback Period Calculating Model for Airport Bridge Facility. Mathematical Problems in Engineering. Warren, L., & Jack, L. (2018). The capital budgeting process and the energy trilemma-A strategic conduct analysis. The British Accounting Review, 481-496.
