A Proposal for the Costs in Capital Budgeting

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Table of Contents

Introduction
Working Capital Commitment Costs
Tax Factor Costs
References

Introduction

The startup cost of a JXT Ltd business is calculated by summing up all the expenses needed for the business to operate. According to the provided spreadsheet, total expenses in 2021 would be $364 800, and this sum is more than the total revenue of that year. Therefore, the business would need extra funding to cover the negative net income for the continuing yearly operations. The total sum of the startup costs, then, can be seen in the sum of the net income of the year and the company’s assets. For 2021, the net income was $-144 796, while total assets constituted $82 882. Hence, the costs are:

$-144 796 + $82 882 = $-61 914

There are some advantages and disadvantages of such startup costs. The main challenge of JXT Ltd. would be covering the gap between revenue and expenses. It can lead to increased long-term liabilities associated with loans (Williams, 2019). On the other hand, the income statement shows a positive tendency for growth in total revenue when 2021 is compared to 2020. Moreover, the company increases its assets, which is another positive tendency. In other words, if the company manages to maintain positive revenue growth and expansion of assets, it is possible to reduce the number of liabilities and establish a successful business. However, it is essential that the company thoroughly analyzes the potential risks of capital budgeting and chooses the appropriate direction of operations.

Working Capital Commitment Costs

The second important cost to note is the working capital commitment costs. It is calculated by extracting the current liabilities of the company from the sum of its current assets. In JTX Ltd current assets constituted $27 874 in 2021. Current liabilities, on the other hand, are summed at $42 205. Hence, the working capital commitment costs are equal to:

$27 874 – $42 205 = $-14 330

Negative working capital costs pose several challenges for the company. First, JXT Ltd. may face many risks associated with its inability to meet future obligations (Williams, 2019). Furthermore, some of the investors may refuse to allocate their funds to the company due to the aforementioned risks and negative costs. However, it should be noted that the company is still in the initial development process, and these tendencies can be mended by intelligent planning and capital budgeting.

Tax Factor Costs

Lastly, it is essential to discuss the significance of taxes to capital budgeting. The transparent documentation of income tax expenses and net income before taxes allows investors to comprehensively evaluate the profitability of the project (Boadway, 2020). Governmental policies, including taxation and regulations, play a vital role in the longevity of the business and should be taken into consideration for capital budgeting (Boadway, 2020). In the current case, some of the most significant tax factor costs are income tax expenses and deferred income tax. The former was equal to $14 936 in 2021 and $9 920 in 2020, while the deferred income tax shifted from $4000 in 2020 to $6000 in 2021. Thus, the change in income tax constituted

$9 920 – $14 936 = $-5016

The difference in the second parameter is explained by the reduced impact of depreciation, which shifted from $2000 to $1000. The primary challenge with these costs is associated with the accurate evaluation of government policies and their impact on the business. Overall, the tax factor cost metrics are necessary to constitute a comprehensive financial image of the organization and provide more information to potential investors.

References

Boadway, R. (2020). Economic evaluation of projects. In A. Shah (Eds.), Policy, program and project evaluation: A toolkit for economic analysis in a changing world (pp. 59-105). Springer International Publishing.

Williams, S. (2019). The financial times guide to business start up 2019/20: The most comprehensive guide for entrepreneurs (the FT guides). FT Publishing International.

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A Proposal for the Costs in Capital Budgeting

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