Lincoln Sports

Lincoln Sports Eq



Lincoln Sports Eq

Introduction

Capital budgeting is one of the key areas of decision-making in the company. Investment decisions related to the current assessment of the effectiveness of future operations. This means that at present the company's management must evaluate the future market conditions in both terms for revenue and expenditures and adjust to the prediction of its activities taking into account the strategy adopted by the technological, organizational and financial people. This paper discusses the case of Lincoln Sport where the decision regarding the introduction of the new product in the market along with the risk, cost and working capital involved in it.

Discussion

Management in the case has used 12% of the discount rate in order to evaluate the average risk of the project. The reason which mentioned by the company's management was firstly the risk associated with the project was quite high due to the high completion in the sports equipment company and secondly, investment in this project would no more be putting the money lion's month. However, the company DOL is also increasing which indicating high volatile to the earnings. Hence, recommendation of the hurdle will be useful in order to compensate the risk.

As manager or investor look for minimum rate of return on a project, suggesting hurdle rate to be 12% by the management shows that project is acceptable as the internal rate is 7% in order to show to the investors that the investment is not riskier. Discounting the future cash flow given by the Lincoln Sports Eq for the project by the hurdle rate i.e. 12% would tends to a huge and positive NPV which will automatically lead to the acceptance of the project. Based on the information in the case, it is very riskier to adopt this investment as to expand their ball department. However, there is no doubt that the company will add value to their firm but for longer time as sport manufacturing companies are very competitive, they have huge brands such Nike, Adidas and Spalding, which will bring more innovative product and will beat the Lincoln Sports with their strong brand image. Furthermore, this concept has not been implemented before so they might generate more revenue in first two years but after that a huge risk of going down.

Leasing will not reduce the risk but rather it will increase the risk for the company. If the company investment project will not worked, then the company money which was initially paid to the leasing company will be stuck with them and Lincoln Sports would be helpless. As we know that leasing is a loan for the acquisition of property in exchange for fees and optional with a property right on time. Hence, this will not reduce the cost permanently but rather so short period of time. The latter bought or built a building for use as professional offices or factory, and shall furnish the possession by a lease long term to the other ...