48 138 explain why a corporations customer base is

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138) Explain why a corporation's customer base is considered an intangible asset. Answer: A corporation's customer base is considered an intangible asset because if it is handled properly, a corporation's existing customers will be a source of revenues for an indefinite time period. One could make the case that the customer base is like an annuity N a steady source of revenues and earnings. Thus it is an asset, although an intangible one. An existing customer usually will stay with a corporation if he or she is handled properly. Usually there is minimal marginal cost in retaining a customer other than producing a satisfactory product. In contrast, attracting new customers takes time, effort, and most times substantial marketing dollars. Thus, it is much easier to retain a current customer than to obtain a new one. This is why the existing customer base is considered an asset. 139) Explain capital budgeting and briefly discuss each of the five stages of a capital budgeting project. Answer: Capital budgeting is long - run planning for investment projects that usually have a life that is greater than one year. Stage 1 of a capital budgeting project is the identify projects stage in which a firm determines which types of capital investments are necessary to accomplish organisation objectives and strategies. Stage 2 is the obtain information stage in which a firm gathers information from all parts of the value chain to analyse alternative projects. Stage 3 is the make predictions stage in which the firm forecasts all potential cash flows attributable to the alternative projects. Stage 4 is the make decisions by choosing among alternatives stage in which the firm determines which investment yields the greatest benefit and the least cost to the organisation. Stage 5 is the implement the decision, evaluate performance, and learn stage that is further separated into two sub stages: (1) obtain funding and make the investments selected in the stage 4 process, and (2) track the realised cash flows, compare against the forecast numbers, and revise plans if necessary. 49
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140) Bock Construction Company is considering four proposals for the construction of new loading facilities that will include the latest in ship loading/unloading equipment. After careful analysis, the company's accountant has developed the following information about the four proposals: Proposal 1 Proposal 2 Proposal 3 Proposal 4 Payback period 4 years 4.5 years 6 years 7 years Net present value $80 000 $178 000 $166 000 $308 000 Internal rate of return 12% 14% 11% 13% Accrual accounting rate of return 8% 6% 4% 7% Required: How can this information be used in the decision - making process for the new loading facilities? Does it cause any confusion? Answer: The managers can use the information to determine which proposal is best under the various alternatives. This may be accomplished by ranking each alternative. Also, the managers must determine the factors that are the most important to the company. For example, if short - run risk is high, a short payback period may be highly desirable. In this case, Proposal 1 is best. However, if total cash returned is critical to the company's operations, then Proposal 4 is probably best.
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