Automotive

Sparklin Automotive Company Capital Structure

As the business analysis for Sparklin Automotive Company, I was requested to explain why SAC should purchase the new equipment. If SAC decides to acquire the new equipment it would allow them to manufacture 100,000 additional spark plugs each year, over what they are producing currently. In order to determine if they should make this purchase we will look at the company capital structure. The first thing we will discuss is what is capital budgeting and how the organization use it to make the right decision for their organization.

Capital Budgeting Decisions

“Capital budgeting is used to describe how managers plan significant investments in projects that have long term implications such as the purchase of new equipment.”(Garrison, Noreen, & Brewer, 2012, p. 580) This is what the management team at SAC will use to determine if investing in new equipment will be worth investing in. In order for our organization to make the correct decision, several question needs to be asked such as would the new equipment reduce the company costs or should they lease or outright buy the equipment that is needed. We have develop an excel spreadsheet detailing the cash flow structure of SAC and how net present value will be used to make their decision.

Net Present Value Method

When is net value used? It is a valuable method, that many organization uses, “it is used to evaluate physical assets investments projects in which a business might want to invest.”(Peavier, 2013, p. 1). For example if an organization investment has an encouraging NPV that means the cash inflows surpasses the current value of the cash outflows. If you look at SAC NPV which is $681,113.43 which could be consider as being positive, and they should consider accepting the project. But on the other hand if the investment has a negative NPV it should be decline.

IRR

IRR is a “discount rate often used in capital budgeting which makes the net present...