Not too sure about non-profit organizations, but many of these challenges can be applied to NPO’s as well. Hope this helps!
1st: Making fairly sound and reasonable predictions about demand through the life of the project.
2nd: Controlling variable costs through the years. The analyst has to be realistic about what VC’s might increase and by approx. how much?
3rd: Depreciation on plant/equipment. What method of depreciation is being used?
4th: Taxes on your EBIT. Watch for this baby! I don’t know the tax scenario with NPO’s. Sure demands some research.
5th: Salvage value of the plant/equipment. Predicting the monetary value of the plant/equipment at the end of the project to factor into your NPV, IRR and MIRR.
6th: Setting a realistic rate of return. Too high and even a good project will seem like it’s not good enough. Too low and your NPV and other measures might seem better than they really are.
If your project is international look out for future fluctuations in the exchange rate. Witholding tax by the foreign govt. can affect your bottom line as well.
In an age of terrorism and international migration of jobs, watch for these too. Perform sensitivity analyses on initial investment, demand, price, variable & fixed cost and salvage value to get an in-depth view of how changes in these variables affects your NPV, etc.
Good luck! Looking forward to what others have to say!
One Response for "What are some challenges that an analyst might encounter in applying capital budgeting analysis to for-profit."
Not too sure about non-profit organizations, but many of these challenges can be applied to NPO’s as well. Hope this helps!
1st: Making fairly sound and reasonable predictions about demand through the life of the project.
2nd: Controlling variable costs through the years. The analyst has to be realistic about what VC’s might increase and by approx. how much?
3rd: Depreciation on plant/equipment. What method of depreciation is being used?
4th: Taxes on your EBIT. Watch for this baby! I don’t know the tax scenario with NPO’s. Sure demands some research.
5th: Salvage value of the plant/equipment. Predicting the monetary value of the plant/equipment at the end of the project to factor into your NPV, IRR and MIRR.
6th: Setting a realistic rate of return. Too high and even a good project will seem like it’s not good enough. Too low and your NPV and other measures might seem better than they really are.
If your project is international look out for future fluctuations in the exchange rate. Witholding tax by the foreign govt. can affect your bottom line as well.
In an age of terrorism and international migration of jobs, watch for these too. Perform sensitivity analyses on initial investment, demand, price, variable & fixed cost and salvage value to get an in-depth view of how changes in these variables affects your NPV, etc.
Good luck! Looking forward to what others have to say!
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