Capital Budgeting In State Energy Firm Of Malaysia †Free Samples

Question: Discuss about the Capital Budgeting In State Energy Firm Of Malaysia. Answer: Introduction The issue that has been presented in the question is that a recent financial article has to be chosen on one of the following accounting issues like the financial statements; equities market or stock valuation; capital budgeting of a business entity; raising equity capital or cost of capital. The particular topic that has been chosen for the purpose of analyzing in this particular study is capital budgeting of a business entity. Capital budgeting refers to the process of allocation of the funds to the capital projects that have a longer life term. This particular study aims to look at the issues that the selected firm in the news article is facing and an overview into the capital budgeting techniques that should be utilized in order to prepare a proper capital budget. The news article that has been chosen is a recent one as it dates back to August 15, 2017 and focuses on the issues that the firm faces in the absence of a proper capital budgeting structure. To be more precise, the capital budgeting techniques and concerns in relation to the long-term investments andfinance decisions have been discussed. News article review The well-known state energy firm of Malaysia Petronas, has been in the news due to the reason that the business firm has been selecting markets for the purpose of expansion. The state oil-energy firm has taken up the decision to concentrate on the geographical position of the company. It has been mentioned in the news article that the selected company, Petronas will be focusing on South East Asia and Canada as because it has large amount of reserves in these countries. Moreover, Petronas has been focusing on Mexico where the company has picked up three blocks. The management of the corporate entity has also reduced the payment of the dividends to the respective Government body. The organization has been expected to make a payment of RM 13 billion in the current financial that is half the payout of the financial year for 2015. The dividends from Petronas, being one of the biggest employers of Singapore plays a major role in the economy, as the firm is one of the biggest employers of M alaysia. Furthermore, the firm contributes majorly to the countrys revenue[1]. The management of the firm further states that the capital budgeting facilitates the regular updating of the portfolio of the firm. Moreover, this decision should not include any consideration of the emotional attachments that may have been generated due to the long-term relationship that has grown. Moreover, the corporate entity further states that the company has carried on reviewing the ongoing investments that it has engaged into during the particular financial year. The management of the corporate entity also has capital budgeting plans that include business interests in more than fifty countries worldwide. The capital budgeting that has been planned by the giant business entity also includes plans for executing the cost efficiency by the firm. An instance of capital budgeting by the firm also includes a US$90 million project in China while a floating liquefied natural gas facility that is a unique plant and is set to begin the operations in the month of June. Relevancy with the chosen finance topic - Capital Budgeting Capital budgeting essentially refers to the process of making decisions by the corporate entities in regards to the long-term decisions pertaining to the investment projects. It should be noted here that the managers face difficulty in choosing projects from among a group of multiple projects that are long term in nature. Capital budgeting aims to analyze each of the investment projects by the consideration of the cash flows that are generated by the returns that are derived from these investment projects. For instance, in case of Petronas, the firm may be able to devise a useful portfolio by estimating the potential revenues that can be derived from the different projects. [2] The steps that are considered by the managers in selecting the relevant investment projects are as follows: Identification of the projects that can be aligned with the strategy or planning of the organization Gathering of the relevant information from all parts of the value chain in order to execute the evaluation of the alternative projects The further identification of the cash flows that can be attributed to the alternative projects The future yields from the alternative projects has also to be determined in order to choose from the alternative projects Lastly, the investment is done in the selected project and the obtained returns and cash flows are compared with the estimated ones in order to evaluate the usefulness of the capital budgeting structure Here, it should be noted that the capital budgeting structure by a business entity might undertake the various techniques of capital budgeting like the payback period method; discounted payback period method; net present value; accounting rate of return; internal rate of return and profitability index. Payback period refers to the measurement of time within which the desired returns are derived from the selected project. The Net Present Value refers to the initial cash outflow less sum of discounted cash inflow. The Accounting Rate of Return refers to the profitability of the project and the Internal Rate of Return refers to the discount rate at which net present value of the project is zero[3]. In case of the chosen company, the management of the company has been able to devise the capital structure in such a way that it has been able to invest in various projects on a worldwide basis. The firm incurring loss has been one of the major reasons that the management has planned a cost efficient budget. Moreover, the reviewing of the portfolio regularly has also enabled the management of the company to strengthen the portfolio of the company, which has effectively resulted in a proper capital budgeting by the company[4]. Recommendation The particular recommendation in case of Petronas is that the firm should consider the five mentioned steps in choosing projects for the purpose of expanding the business. The relevant capital budgeting technique should also be considered by the firm in order to prepare a proper capital budgeting structure. Moreover, the projects that have been undertaken by the firm should also be properly analyzed and future returns from the firms should also be computed in a proper way. This will enable the firm to operate in an efficient manner and derive the required returns from the investment projects without having to consider the risks associated with such investments. Conclusion The conclusion that can be derived from the discussion in the preceding paragraphs is that capital budgeting is an important part of the financial management structure. The advantages of capital budgeting facilitates the estimation of the investment option that results in the preparation of an efficient capital budgeting plan. Moreover, capital budgeting also helps the management of the firm in making an informed decision in regards to the investment that is considered by analyzing all possible options. References Chittenden F, Derregia M. Uncertainty, irreversibility and the use of rules of thumbin capital budgeting. The British Accounting Review. 2015 Sep 1;47(3):225-36. Cleverley WO. Essentials of health care finance. Jones Bartlett Learning; 2017 Feb 15. De Visscher FM. Financing transitions: Managing capital and liquidity in the family business. Springer; 2016 Apr 30. Dudin M, Kucuri G, Fedorova I, Dzusova S, Namitulina A. The innovative business model canvas in the system of effective budgeting. Gitman LJ, Juchau R, Flanagan J. Principles of managerial finance. Pearson Higher Education AU; 2015 May 20. Leaner, meaner Petronas targets key markets for growth NST Online. 2018 https://www.nst.com.my/business/2017/08/268229/leaner-meaner-petronas-targets-key-markets-growth Levin V, Hallgren A. The choice of capital budgeting techniques: a human capital approach. Matthew BT. Financial management in the sport industry. Taylor Francis; 2017 Feb 9. Petty JW, Titman S, Keown AJ, Martin P, Martin JD, Burrow M. Financial management: Principles and applications. Pearson Higher Education AU; 2015 May 20. Rossi M. The use of capital budgeting techniques: an outlook from Italy. International Journal of Management Practice. 2015 Jan 1;8(1):43-56. Soltani S, Nayebzadeh S, Moeinaddin M. The Impact Examination of the Techniques of Management Accounting on the Performance of Tile Companies of Yazd. International Journal of Academic Research in Accounting,Finance and Management Sciences. 2014;4(1):382-9. Williams EE. Investment, capital, and finance: corporate and entrepreneurial theories of the firm. Can the Free Market Pick Winners?: What Determines Investment: What Determines Investment. 2016 Sep 16.