Essay About Pinnacle Corporation And Firm’S Strategic Policy

The Pinnacle Corporation – Capital Budgeting
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THE PINNACLE CORPORATION
CAPITAL BUDGETING
II CASE STUDY
DECEMBER 2014
SUBJECT: The Pinnacle Corporation Capital Budgeting Case Study
Table of Contents
Question 1
a.) What is a firm’s strategic policy? How, if at all, does it influence a firm’s choice of capital
budgeting projects?
The Pinnacle Corporation has three main production divisions: ball production, equipment
production and accessories production. They had the idea to introduce new project, so called
Medallion LS, besides they had three main options, three strategies to choose from. According to
the first one, no new project was needed and they would raise their revenue because of the boom
in this industry, the second strategy was suggesting that there was no demand on old accessories
and only new production was profitable and finally, according to the third strategy, both of the
projects were important. If they implemented new project they saved $1 million of working
capital and they didn’t have land cost.
We think, that firm’s strategic policy would influence The Pinnacle Corporation’s choice of
capital budgeting strategy. Because with different options they had different expenses, for
example if Keep OLD strategy was selected, then the firm would lack sufficient managerial and
technical expertise for any other major expansion.
b.) What is and “unbiased” cash flow forecast? Do you find it surprising that studies have
found that the actual CF of “sales projects” tend to be well below the predicted amounts?
Defend your answer.
The challenge in practice is that the cash flows forecasts may be a biased measure of the
expected