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Pay-Offs and Risks of Capital Investments
Major capital investment involves considering the long-term, high expense of the project before taking into consideration the three most important aspect of capital investment which are planning, evaluation of alternatives, and financing. The decision process of making capital investments is mainly concerned with capital budgeting; through this the organisation identifies capital expenditures, estimates future cash flow from proposed capital project.
The Port Harcourt Electricity Distribution Company (PHEDC), Rumuodomaya Division is in dire need of building additions and equipments in the power station. This will be a major capital investment because the whole power station is submerged in water due to the rains. When the station was renovated last year, the contractors did not elevate the installed equipment to a higher ground considering that the environment is a swampy one and the new properties been built by individuals are higher in foundation than the power station. This project is of utmost importance because the resulting effect of the flooding has been that the entire area including my home is under blackout for more than a month now. The acquisition of these equipments and addition of the building will need to be passed through a decision process of the amount of capital budgeting; through this the PHEDC will identify its capital expenditures, estimate future cash flow from this proposed investment. The PHEDC will also have to do an analysis of the risks and overall cost and compare it with their estimated loss of revenue from customers.
The potential pay-offs apart from the value on the power station, customers living, effective distribution of electricity and regular billing; will be the recovery of this investment from customers. Customers who do not have metres (prepaid or post paid) are usually billed higher rates. The balance of amount left is distributed amongst them and termed estimated bill. The PHEDC will ensure this burden is not too much for the customers (Mikesell, 2004) and source for funding from the city council which is directly opposite its power station and also uses electricity generated from the PHEDC, Rumuodomaya power station.
Mikesell, J. L. (2014). Fiscal administration: Analysis and applications for the public sector (9th ed.). Boston, MA: Wadsworth.