Importance of Indirect Effects

With eh usage of a suitable and appropriate discounting rate the company must discount the future estimated cash flows of the project. The purpose for discounting the cash flows to be generated by the company is to ensure that the factors like inflation rates prevalent in the country, the systematic risk of the investors of the company are factored in. after the cash flow to be generated by the project has factored in these elements that are capable of impacting them severely the company will be able to grasp the actual or the real value that will be generated or will be accrued to it from the project (Ciroth et al., 2015). 

The internal rate of return can be defined as the returns in terms of percentage that is being generated by the project for the company. The cost of capital of the company must always be less than the internal rate of return that is being generated from the project. The cost of capital refers to the payment that the company needs to make to the lenders and the financial institutions (Martinez-Sanchez et al., 2015). It is often seen that the net present value FO a particular project is positive, but the amount of the returns generated by it is less than the cost of the capital of the company. In such a case, the project will fail to generate enough revenue to ensure the repayment of the debts of the company and at the same time ensure that value is created for the stakeholders of the company.

This method undertakes the determination of the value FO the cash flow or revenue that is being generated by the project within a span of one year. This information is very crucial for the purpose of capital budgeting decisions. The reason for this is that the management of the company is able to identify the number of ear it will take to retrieve back the entire amount that has been invested by the company in the project (Moreau & Weidema, 2015).  

Calculation of the Annual Worth of different Alternatives
Particular Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	A	B	C	D
Supply units	5000	5000	5000	5000
Sales price per unit	$3.00	$3.00	$3.00	$3.00
Sales (1)	$15,000.00	$15,000.00	$15,000.00	$15,000.00
Fixed Cost	$10,000.00	$14,000.00	$20,000.00	$30,000.00
Capital Recovery Factor	0.22960738	0.22960738	0.22960738	0.22960738
(A/P,I,N) (2)	$2,296.07	$3,214.50	$4,592.15	$6,888.22
Salvage value	$500.00	$700.00	$1,000.00	$1,500.00
Sinking Fund factor	0.12960738	0.12960738	0.12960738	0.12960738
(A/F, I, N) (3)	$64.80	$90.73	$129.61	$194.41
Annual Labor cost (4)	$9,000.00	$7,500.00	$5,000.00	$3,000.00
Annual Power and maintenance cost (5)	$500.00	$800.00	$1,000.00	$1,500.00
Annual Worth (1-2+3-4-5)	$3,268.73	$3,576.22	$4,537.46	$3,806.19

Calculation of the Present  Worth of different Alternatives
Particular	A	B	C	D
Sales	$15,000.00	$15,000.00	$15,000.00	$15,000.00
Less:
Annual Labor cost	$9,000.00	$7,500.00	$5,000.00	$3,000.00
Annual Power and maintenance cost	$500.00	$800.00	$1,000.00	$1,500.00
Depreciation	$1,583.33	$2,216.67	$3,166.67	$4,750.00
Taxable Income	$3,916.67	$4,483.33	$5,833.33	$5,750.00
Less:
Tax Payment	$1,175.00	$1,345.00	$1,750.00	$1,725.00
Net Income after tax	$2,741.67	$3,138.33	$4,083.33	$4,025.00
Add:
Depreciation	$1,583.33	$2,216.67	$3,166.67	$4,750.00
Annual Cash inflow after tax	$4,325.00	$5,355.00	$7,250.00	$8,775.00
Present value factor of Annuity	4.3553	4.3553	4.3553	4.3553
Present Value of cash inflow after tax	$18,836.50	$23,322.42	$31,575.64	$38,217.41
Salvage Value	$500.00	$700.00	$1,000.00	$1,500.00
Present value factor	0.56447393	0.56447393	0.56447393	0.56447393
Present value of salvage	$282.24	$395.13	$564.47	$846.71
Fixed Cost (initial Investment)	$10,000.00	$14,000.00	$20,000.00	$30,000.00
Present Worth	$9,118.74	$9,717.55	$12,140.11	$9,064.12

Calculation of IRR of different Alternatives
Particular	A	B	C	D
Year 0	-$10,000.00	-$14,000.00	-$20,000.00	-$30,000.00
Year 1	$18,836.50	$23,322.42	$31,575.64	$38,217.41
Year 2	$18,836.50	$23,322.42	$31,575.64	$38,217.41
Year 3	$18,836.50	$23,322.42	$31,575.64	$38,217.41
Year 4	$18,836.50	$23,322.42	$31,575.64	$38,217.41
Year 5	$18,836.50	$23,322.42	$31,575.64	$38,217.41
Year 6	$19,336.50	$24,022.42	$32,575.64	$39,717.41
Internal Rate of Return	188%	166%	157%	126%

The numerator of the conventional bene fit cost ratio contains the net benefit that is possible for the company to generate from the project by the company. The denominator of the formula contains the total expense that is incurred by the company in respect of the project. On the other hand, the numerator of the modified benefit cost ratio contains the revenue generated by the project after adjusting the operating expenses and the maintenance expenses incurred by the management in the project. Hence, the numerator only consists of the real and the net income generated by the project and the denominator is left to represent the initial cost of the project (Martinez-Sanchez et al., 2016).

Traditional Methods of Capital Budgeting Decisions

The recommendation that is being made based on the result of the two methods is same. It becomes irrelevant that the formula used by the two methods is different from each other. The reason being that the numerator contains the revenue generated by the project management and the denominator contains the cost incurred in respect of the project. If the revenue of the project is more than both the methods will yield an amount that will be greater than one. In addition, if the expenses incurred in respect of the project are more than both the formula will yield an amount that will be less than one. Hence, depending upon the results given out by any of the two method it can be decided if the proposed project will be accepted by the management or not.

Calculation of Conventional B/C Ratio Value using Present Worth method
Particulars	Machine A	Machine B
Fixed Costs	$20,000.00	$30,000.00
Salvage Value	$2,000.00	$0.00
Annual receipt	$150,000.00	$180,000.00
Annual Disbursement	$138,000.00	$170,000.00
Present worth Factor of Annuity	6.144567106	6.144567106
Present worth Factor of Single payment	0.385543289	0.385543289
Present worth of benefit	$921,685.07	$1,106,022.08
Present worth of annual disbursement	$847,950.26	$1,044,576.41
Present value of salvage	$771.09	$0.00
Initial Cost	$20,000.00	$30,000.00
B/C Ratio value	1.06	1.03

Calculation of Modified B/C Ratio Value using Present Worth method
Particulars	Machine A	Machine B
Fixed Costs	$20,000.00	$30,000.00
Salvage Value	$2,000.00	$0.00
Annual receipt	$150,000.00	$180,000.00
Annual Disbursement	$138,000.00	$170,000.00
Present worth Factor of Annuity	6.144567106	6.144567106
Present worth Factor of Single payment	0.385543289	0.385543289
Present worth of benefit	$921,685.07	$1,106,022.08
Present worth of annual disbursement	$847,950.26	$1,044,576.41
Present value of salvage	$771.09	$0.00
Initial Cost	$20,000.00	$30,000.00
B/C Ratio value	3.83	2.05

Calculation of the After Tax Cash flow of the Leasing alternatives
Particulars	1	2	3	4	5	6	7	8	9	10
Lease Cost	80000	60000	50000	50000	50000	50000	50000	50000	50000	50000
Other costs	4000	4000	4000	4000	4000	4000	4000	4000	4000	4000
Total Costs	84000	64000	54000	54000	54000	54000	54000	54000	54000	54000
Tax savings on expenses	25200	19200	16200	16200	16200	16200	16200	16200	16200	16200
After Tax Cash Flow	58800	44800	37800	37800	37800	37800	37800	37800	37800	37800

Calculation of Equivalent Annual cost for the alternative ($)
Particulars	1	2	3	4	5	6	7	8	9	10
After Tax Cash Flow	56000	42000	35000	35000	35000	35000	35000	35000	35000	35000
PV factor	0.9091	0.8264	0.7513	0.6830	0.6209	0.5645	0.5132	0.4665	0.4241	0.3855
PV of Cash flow	50909	34711	26296	23905	21732	19757	17961	16328	14843	13494
Net Present Value	239936
Annuity Factor	6.144567106
Equivalent Annual Leasing Costs	39048
Other costs	4000
Equivalent Annual Cost	43048

Calculation of equivalent Annual cost of alternative options
Particulars	Keep X	Replace X with Y	Replace X with Z
Initial Cost	$0.00	$100,000.00	$160,000.00
Annual Maintenance and Operating cost	$90,000.00	$70,000.00	$60,000.00
Salvage Value	$0.00	$30,000.00	$50,000.00
Pv Factor	0.3855433	0.385543289	0.385543289
PV of Salvage	$0.00	$11,566.30	$19,277.16
Net Initial Cost	$0.00	$88,433.70	$140,722.84
Annuity Factor	6.1445671	6.144567106	6.144567106
Equivalent Annual Cost	$90,000.00	$84,392.18	$82,901.99

The company that is being currently studied is Tero Technology.  The company is based in Australia and commenced its operations in the year 1999. One of the main objectives of the company is to deliver the customers with quality product at reasonable prices.

The present report deals with the utility that the life cycle costing provides to the management of the company in respect of the creating value for its stakeholders. The tool ensures that the management is able to monitor the costs incurred by it on a regular basis. Subsequently the implementation by the same is riddled with certain gaps and the same will be illustrated in the report. Pointing out the gaps in the implementation of the system is necessary because of the fact that only by properly recognising them; it will be possible to alleviate them. Subsequent to that, required recommendation will be made to the management for the purpose of proper integration of the system into the operations of the company (Sakao & Lindahl, 2015).

It is a near impossible job to completely alleviate the gaps that are present in the accounting and management tools being used by the management of the company. The gaps arise due to the presence of several factors that influence these in a continuous basis. These factors may or may not be identical in case of different organisation using the same tool. The presence of these gaps in the in the accounting and the management tools used by the company must not be a hindrance in their usage by the management of the company. Instead, honest and rigorous efforts must be made in the part of the management to eradicate the gaps present within these accounting tools. The proper discovery of the gaps in the accounting and management tool used by the company is not for the purpose of deciding whether the company should make use of such tools or not rather to find ways in which these gaps can be eradicated by the management of the company (Strazza et al., 2015). These are the following gaps present in the life cycle costing tool used by the management:

1. For the purpose of determination or indicating the nominal cash flows of the company, nominal rates must be used by the company. On the other hand, in case of the actual rates usage by the company the management must factor in the variations in the price level index. There are also many other factors that should be factored in by the company like the effects that the fluctuating inflation rates have on the decisions and the elements of the tools used by the company.  
2. The various sources from which the company arranges the funds for its various projects undertake several systematic risks. In return, of this systematic risk undertaken by them, they demand good and justifiable return from the company. Hence, these systematic returns must also be factored in by the company (Al-Yafei et al., 2017).
3. For the determination of the weights to be used by the management in the use of the accounting and the management tool utilised by the company, the market values of the financial sources used by the company must be utilised. In case the market information regarding the values is absent, the available accounting information available with the management must be utilised for the same purpose.
4. The discounting rate that is being presently used by the management is not stagnant or fixed. In other words, there are several factors that are continuously affecting the discounting rates used by the company. The factors affecting the discounting rates may or may not be in the control of the management. For instances the factors affecting the discounting rate may range from items like capital structure of the company, the estimated cash flow of the company and the systematic risk that is borne by the investors of the company (Auer et al., 2017).

Alternatives in Capital Budgeting Decisions

For the purpose of maintaining sustainability in the operations of the management, it is of utmost importance that the management undertakes regular and continuous monitoring of the costs that are incurred by it for conducting the various operations of the company. The accounting and management tools used by the management for the purpose FO decision making and execution of the operations will yield results only if the company undertakes continuous monitoring of its operations. The maintenance and upgradation of the internal controls of the company is needed to ensure that the operations of the management do not lead to unnecessary leakage of funds and create returns for the stakeholders of the company. Hence, some of the recommendations to be made to the management are as follows:

1. The management of the assets that are currently under the process of development must be objectively analysed by the management. For the purpose, FO conducting an objective analysis of these assets the management must make sure to weigh in the further costs to be incurred for their development and the expected revenue to be generated by them in the future.
2. The weights to be used by the management for the purpose of conducting the capital budgeting decisions of the project must be based upon the market value of the financial resources used up by the company.
3. The management must make use of the discounting rates that take into consideration the various fluctuations in the inflation rates of the economy of the company, the factors influencing the future cash flows of the company and most importantly the internal and the external factors that can affect the operations of the company (Di Giuseppe et al., 2017).  

Conclusion:

The cost implications of the decisions taken up by the management of the company greatly influences the revenue and the cash flow that is going to be generated by the company in the  future alongwith the returns that the company is going to earn for the stakeholders of the company. For the considering, the cost implications of the decisions to be taken up by the management the company must ensure to factor in the returns created for the stakeholders. The management must also develop an understanding regarding the importance of the decisions taken up by it in respect of the fixed assets to be acquired by it. The reason for the significance of the fixed assets and the corresponding decisions is that the fixed assets are going to be used by the management for the purpose of generation of revenue and cash flow of the company in the future. Hence, the management must integrate the usage of the modern accounting and management tools available with it for managerial decision-making. Tools such as the life cycle costing play a vital role in determining the efficiency of the decisions taken up by the management.

Reference

Al-Yafei, E., Ogunlana, S., & Oyegoke, A. (2017, October). Application of Value Engineering and Life Cycle Costing Techniques for Offshore Topside Facility Projects: Towards Sustainability. In SPE Kuwait Oil & Gas Show and Conference. Society of Petroleum Engineers.

Auer, J., Bey, N., & Schäfer, J. M. (2017). Combined Life Cycle Assessment and Life Cycle Costing in the Eco-Care-Matrix: A case study on the performance of a modernized manufacturing system for glass containers. Journal of cleaner production, 141, 99-109.

Ciroth, A., Hildenbrand, J., & Steen, B. (2015). Life cycle costing. Sustainability Assessment of Renewables-Based Products: Methods and Case Studies,, 215-228.

Di Giuseppe, E., Iannaccone, M., Telloni, M., D’Orazio, M., & Di Perna, C. (2017). Probabilistic life cycle costing of existing buildings retrofit interventions towards nZE target: Methodology and application example. Energy and Buildings, 144, 416-432.

Galle, W., Vandenbroucke, M., & De Temmerman, N. (2015). Life cycle costing as an early stage feasibility analysis: The adaptable transformation of Willy Van Der Meeren’s student residences. Procedia Economics and Finance, 21, 14-22.

Ilg, P., Scope, C., Muench, S., & Guenther, E. (2017). Uncertainty in life cycle costing for long-range infrastructure. Part I: leveling the playing field to address uncertainties. The International Journal of Life Cycle Assessment, 22(2), 277-292.

Martinez-Sanchez, V., Kromann, M. A., & Astrup, T. F. (2015). Life cycle costing of waste management systems: Overview, calculation principles and case studies. Waste management, 36, 343-355.

Martinez-Sanchez, V., Tonini, D., Møller, F., & Astrup, T. F. (2016). Life-cycle costing of food waste management in Denmark: importance of indirect effects. Environmental science & technology, 50(8), 4513-4523.

Moreau, V., & Weidema, B. P. (2015). The computational structure of environmental life cycle costing. The International Journal of Life Cycle Assessment, 20(10), 1359-1363.

Sakao, T., & Lindahl, M. (2015). A method to improve integrated product service offerings based on life cycle costing. CIRP annals, 64(1), 33-36.

Strazza, C., Del Borghi, A., Costamagna, P., Gallo, M., Brignole, E., & Girdinio, P. (2015). Life Cycle Assessment and Life Cycle Costing of a SOFC system for distributed power generation. Energy conversion and management, 100, 64-77.

Conventional Benefit cost ratio value using Present worth method