Free «Capital Budgeting» Essay Sample

Capital Budgeting

Capital budgeting refers to the process of planning that a company undergoes in order for it company to determine the effects of its long term investments (Steven 2003). Such investments are usually perceived or projected to bring major economical and financial changes in structure of the organization. Acquiring of new and more sophisticated machinery, putting up of new plants and purchasing of other companies are some of the common examples of capital budgeting. Once the process is completed, the company is able to correctly decide whether the investment is worthy following or not. It mainly deals with the capital of the business and provides the necessary directions on whether an investment will be profitable in the long run or otherwise (Gupta 2004).

Capital budgeting is done following different techniques but the expected result is always the same (Halseth & Markey 2010). Companies need to determine whether their investment is worth carrying out or otherwise (Steven 2003). Some of the methods that are used to determine the trend of investment include equivalent annuity, profitability index, payback period, accounting return rate, net present value, Internal rate of return and modified internal return rate. The methods try to project the future change in cash flows when the investment is made. If there is an expected increase in cash flow, the investment is approved and if the process shows a negative trend in the future, the plan is modified or may even be aborted. A mistake in this process could lead to dire consequences as there might be losses incurred by the company that could lead to bankruptcy in extreme cases (Srinivasan 2006).

The company

Laura Ashley public limited company is a British based textile designing company that was started in the 1953 by Laura Ashley and her husband Bernard Ashley. They at first worked from their house in London but with the expansion that was inevitable due to increased demand of their clothes, they were forced out of their rental house to a more spacious one (May 2010).

The company grew and went public in 1985 just after the death of its main founder Laura Ashley. The shares were over priced by 34 times allowing the company to obtain a lot of money form the company going public. The acquisition of the money from shares prompted the then management team to make a decision to expand into the United States. This idea seemed sound especially after the knowledge that the shares had been over scribed by 34 times. Up to that moment, the company had grown to become a force in the industry in Europe. It was therefore the ideal moment for Laura Ashley to go international and venture into other continents, North America. However, there were several other things that planners did not consider, which led to the slumping of the company in the 1990s. It was a period that the company should have expanded in every relevant part of the world since there were enough resources that had been left to do it.

Corporate investment decision

Between 1986 and 1989, Laura Ashley took a decision to expand their business into North America. This was due to the abrupt amount of money the company had gained after their sale of shares. On top of geographical location diversion, the company also diversified their product range from several acquisitions. Some if these acquisitions included Sandrigham Leather limited from Scotland, Willis and Geiger which is US based and finally Penhaligons which dealt with toiletries and perfumes. At the same time, the company expanded internally by completing 135000 square foot factory in Wales, which doubled their production capacity (Berry 1995). They made a heavy investment in a computerized design to run the facilities and interconnect the different parts of their branches.


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