CH2 Process Engineering Economics - James R. Couper

CH2 Process Engineering Economics - James R. Couper - 2...

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Unformatted text preview: 2 Financing the Corporate Venture Prior to World War I, most companies were small in comparison to companies today. They were often owned and operated by the founders [1]. The capital expenditures were for replacement of obsolete or worn-out equipment, or perhaps for modest plant expansions. The funds for these expenditures were, for the most part, obtained from company earnings. Between World War I and II, industrial growth took place with plant acquisitions or mergers with other firms. Since these were often major expenditures, internal funds were not sufficient to meet company needs. Established companies, like Du Pont and Eastman, that in the past had relied on internally generated funds were forced to examine their policy in order to replace equipment and grow. External funding sources had to be obtained and the sources were banks, insurance companies, and investment banking houses. In the period after World War II, growth was one of the management goals. For companies to maintain a regular dividend policy, external funding for ventures had to be sought. In very recent times, with the mergers, acquisitions, joint ventures, and alliances, and interest in megadollar projects, external sources were the only option for large-scale projects. Cash generated from internal sources alone could not begin to fund the capital-intensive projects. 2.1 BUSINESS PLANS The planning function is essential for the growth of a successful, vigorous company. Two of the most important areas of management responsibilities are capital budgeting and planning. Committees within the firm are formed to plan for the future and prepare capital budgets. A business plan must be developed before any funds are sought for a new product or venture. The capital budgeting function may be divided into several categories depending upon the time frame involved [1,2]. . Strategic planning involves setting the goals, objectives, and broad business plans for a 5- to 10-year time period in the future. . Tactical planning involves the detailing of the strategic planning for say 2–5 years in the future. . Capital budgeting involves a request, analysis, and approval of expenditures for the coming year. Business plans minimally consist of the following information along with a projected timetable: . Perceived goals and objectives of the company . Market data Projected share of the market Market prices Market growth Markets the company serves Competition, both domestic and global Project and/or product life . Capital requirements Fixed capital investment Working capital Other capital requirements . Operating expenses Manufacturing expenses Sales expenses General overhead expenses . Profitability Profit after taxes Cash Flow Payout period Rate of return Returns on equity and assets Economic value added . Projected risk Effect of changes in revenue Effect of changes in direct and indirect expenses Effect of cost of capital Effect of potential changes in market competition . Project life Estimated life cycle of the product or venture...
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This note was uploaded on 10/28/2008 for the course N n taught by Professor N during the Spring '08 term at Punjab Engineering College.

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CH2 Process Engineering Economics - James R. Couper - 2...

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