U.S. Home Sales to Foreigners Surge 49% to New Record by Alanna Petroff

Introduction

The article titled ‘’U.S. Home Sales to Foreigners Surge 49% To New Record’’ authored by Petroff Alanna (2017) because it demonstrates the manner in which purchasing of houses is tiring and complex. Purchasing a house is considered to be one of the life’s biggest milestone and buyers normally have to look at a dozen of houses before getting a favorable one. This is particularly harder for those that make purchases from far and are forced to make online purchases. Real estate prices keep on increasing as the preferences and demands by consumers changes (Petroff, 2017). On the other hand, the sellers are more focused on making the best sales that not only satisfies the needs of the consumers by maximizes their earning by investing in virtual reality to support online business. Based on a national survey report released recently it was established that foreign consumers, as well as recent settlers in the last one year, spent an estimation of 153 billion dollars on acquiring housing properties in the united states (Petroff, 2017). This is accounted to be a 49 percent rise in the rate in the last three years and the utmost rate since the financial crisis (Petroff, 2017).

Political Disorder Effects on Real Estate

Despite the political disorder that emerged after the change of political powers foreign consumers had to ignore the political instability in the quest of making housing purchases. The economic and governmental uncertainty in America and the foreign markets did not discourage foreign consumers from increasing their purchases (Petroff, 2017). It is apparent that the growth is mainly grounded on economic growth and stability in the last few years given that America is known to be a land that is full of economic opportunities. On the other hand, the reinforcement of the American dollar also played a part which resulted in real estate homes becoming more expensive in most parts and immigrants and foreign buyers acted on the assumption that America is a safe, secure location that supports economic investment as well as growth.

Economic Growth Hindrance

However, despite foreign purchase increase, it has been established that most house owners are currently involved in less movement which is creating economic hindrance given that there are fewer houses for sale in an exemption of the new ones which is creating intense competition in the market. It is believed that the home occupants feel the need to maintaining as a form of carefulness rather than a necessity. In that with the increasing housing prices shifting has become even more expensive and based on the effects that the recession caused and the high living cost most of them have no adequate finances for upgrading. Most of these home occupants lost their jobs forcing them to stick to carefulness (Petroff, 2017).

Intervention Options

The increasing interest rates for mortgages and houses purchases are mainly encouraging the home proprietors to modernize and repair their houses to fit their needs rather than moving out. In this context, the economy is not only being affected negatively but the trend is affecting real estate growth. While selling competition is on the rise there are very few sales being made except for the new houses which fail to generate adequate revenue (Petroff, 2017). The desire to occupy bigger and better houses has not faded among the consumers but is apparent that the rates should be adjusted to encourage movement which will create economic opportunities and growth for the real estate business.

Conclusion

Despite the desirable growth that has been experienced in the real estate business the employment rate is low and the interest rate is high which seems to be encouraging house owners to modify their houses rather than moving out. In order to create an economic balance in the sector, there is a need to lower the rates to accommodate the demands of consumers which will in turn increase sales.

Reference

Petroff, A. (2017). U.S. Home Sales to Foreigners Surge 49% to New Record. Retrieved from http://money.cnn.com/2017/07/18/real_estate/real-estate-property-foreigners-purchase/index.html

Federal Budget

 The federal budget is the primary tool used by the US federal government for planning and controlling finances and it normally involves accounting for all receipts and spending plan proposed by the president. The concept of consolidated budget has been used by the Federal Government as the basis of its budgetary analysis and budget presentation from the 1969 Budget.  As a financial tool, the consolidated budget  places its focus on  cash received , the payments the governments makes to the public and any deficit in the budget which includes an excess of cash outlays over cash receipts(Hyman, 2014). The revenues in the budget are the receipts and comprises of almost wholly of  any taxes or compulsory payments made to the government , and other offsetting collections resulting from transactions with the public or a receipt from one account to another both belonging to the government. 

The 1974 Congressional Budget and Impounding Control Act brought about modifications on the role to be played by Congress in the process of federal budget. With this enactment, there was creation of budget committees in Senate and Congress House, and this created Congressional Budget Office. The purpose of this Act was to bring about institutional changes that could help in giving the Congress power over this process (United States 2015).  The enactment was stirred by the refusal of then President Richard Nixon to disburse almost $12 billion of funds appropriated by the Congress and the general fears regarding the budget deficit. A claim by Nixon that the deficit was leading to high inflation saw him shows the intention to control government spending as a result.

Two major goals that the Act aimed at implementing includes centralizing and strengthening authority of the Budgetary process and reduction of the impounding authority exercised by the president as head of executive. The Act gave the Congress the power to carry out its own economic analysis and at the same time bring to an end the monopoly of the Executive on the budgetary information that had been created by Budget and Accounting Act of 1921.  The background of the 1974 Act provides a description of procedures and laws under which the Congress how much money should be spent every year, what the money should be spent on and how such money should be raised (United States 2015).  . However, the envisioned contribution of the Act to the budgeting process has not been achieved.

Federal government revenue

 During the pre World War II period, there was an increase in tax revenue especially on the account of Great Depression and after the recession, there was a clear trend where the power to tax was shifting  from local governments to state governments and then to federal government. After the World War II, there was an initial fall in the government revenue which was then followed by a slow increment in the revenue.  The various changes experienced in tax revenues can be attributed to changes in corporate taxes and individual income taxes.  By 1960s, the revenue obtained from corporate income tax was essential but a shrinking and was the second highest revenue source after individual tax until about 1968. At this point the payroll taxes are indicated to have grown to be part of a bigger share of the revenue. What can be seen is virtually a total reversal of roles between the corporate taxes and payroll taxes in terms of how much they contributed to the federal revenue.

 After reaching their percentage peak of 32 percent during the post war period, what followed was a steady decline so that the corporate tax revenue formed 21 % of overall federal revenues by 1960s, 15 % by 1970s and even less than 10 % by 1980s. There was a brief rebound during the 1990s as the GDP of the  country was increasing and reached about 12 % at the mid of the decade . On the other hand, the revenue from payroll tax increased from about 10 % to 40 percent by 2003. In total, however, the government revenue has been increasing steadily since 1960s to 2007, and there was a strong increase year on year during the mid 2000s from about $ 2.1 trillion to about $2.6 trillion by 2007(White House, n.d). The revenues are then seen to crater during the 2007-2009 recessions and totaled to a low of about $2 trillion. While revenue from corporate taxes decreased in 1970, revenue obtained through taxes from individual income reached a high of around 47 % of overall federal government receipt the same year. This was a higher than average in comparison with receipts from previous years whose average was 45 % (White House, n.d).

 Following the recovery , there was a slow increase in federal revenues from 2010 through 2012 , but the highest increase can be seen since 2003 , and then flattening of this growth  to about $ 3.2 trillion for the years 2015 and 2016.  When discussed using the GDP perspective, the revenue is seen to increase steadily as a proportion of GDP from 2005 and reached 18 % during 2007 fiscal year.  During the recession there was a decline of the revenue to 14.6 % of GDP during 2009 fiscal year and stagnated at around 15 % of GDP during 2012 (White House, n.d).  Later, there has been an increase of up to 18 percent during the 2015 and 2016 fiscal periods.  One major observation is how revenues from corporate income tax have reduced both in terms of federal taxes share that they form part of and as a share of general economy. There are various factors in the economy that contribute to the decline in corporate tax as a share of overall federal government revenue. These taxes are normally sensitive to the prevailing conditions in the economy and a slowdown in the growth of economy has been a major reason in reducing corporate revenues. However, the economy represents just a fraction of reasons for this decline. There have been increased taxes that have been enacted over the years and this has had major impact on the decline of the corporate tax (Morgan et. al 2013). 

In addition, there aggressive strategies for tax avoidance have lead o further decline of corporate tax revenue and this includes protection of overseas corporate taxes.  The post war decline of corporate taxes as part of government revenue has been offset by growth in other sources which include payroll tax incomes and others. The offset has also comes in form of sources such as taxes on retirement benefits and social insurance since the percentage of workforce under social insurance cover and tax rates on payroll increased significantly. This part of the revenue has increased from just 8 percent during the post war periods to about 38 % by 1992 fiscal year. Hence, the trend shown by the data indicates that general, revenues have been increasing since 1960s but there has been major shift in percentage contribution of various source of revenue with corporate tax declining steady in most cases while other sources such as payroll taxes, social insurance and retirement benefits tax revenues increased over the same period ((Skolnik & Dales, n.d).

Federal government expenditures

Government spending has been on the increase from about 20 percent during the 1960s to over 24 % of the economy as per the fiscal year 2012.  Defense spending has formed one of the major areas in which government revenues have been allocated especially during the various wars that the United States has been involved in.  As aforementioned, the data on federal government spending shows an increase during the early 1960s as the country was involved in various wars but the spending remained relatively stable during these times (Skolnik & Dales, n.d).  Since the 80’s, the federal government budgetary spending is seen to be an average of about 20 percent GDP annually.  Another major area where a large allocation of the revenue I observed is the Medicaid or Medicare and social security which came into effect in mid 1900’s and currently they consume more than half of the federal government spending (Morgan, Green, Shinn & Robinson, 2013). General, the trend shows an increase in overall spending since 1960 and this increase is seen in periods where there were crises such as wars or economic downturn. The federal government expenditures surpassed the 30 percent of GDP in 1970s but later decline to around 30 percent during the late and early 1980s.  The expenditures are seen to have again surpassed the 30 percent mark in the 1980s during the last half of President Clinton’s administration which also saw an increase in government revenue during the same period.  A large jump can also be seen since 2006, where spending claimed more than 38 % of GDP during 2009-2010 fiscal year.

The 1960s saw a lot of changes that affected the economy of United States, as American presidents starting with John F. Kennedy adopted different approaches aimed at addressing the public needs. For example, Kennedy sought to deal with the New Frontier Challenges while Lyndon Johnson, his successor (1963-1969) sought to spread the successful economy of the country to a large population of the citizens. Hence, the 1960’s saw a dramatic increase in federal spending as programs such as Medicare, Food Stamps and many education initiatives were started by the government. Expenditures on social welfare strongly moved upward through such programs and the expenditures continued displaying annual increment of almost similar magnitude (Hyman, 2014). Each of these categories of social welfare led to the overall expansion but the Medicare and cash benefits programs of disability, survivors, old and even health contributed to the highest increase in government spending.  Another issue that led to increased spending was the defense budget especially during the Vietnam War. Spending on veterans had declined to 0.7 % by 1966 but rose to 1 % of the country’s GDP by mid-1970s after the Vietnam War.  The expenditure on Vietnam War rose to about $ 168 billion that also comprises of $11 billion that was spend on military operations and about $ 28.5 billion that was spent on military and economic aid in 1953-1975 (Morgan, Green, Shinn & Robinson, 2013).  During the war, so as to meet the necessary efforts, various factories that were used to produce consumer goods were turned into military equipment production areas and this hurt the economy in a great way.  The issue had begun as just a small action by the military but it later turned out to be a major initiative when Johnson assumed the presidency (Morgan et. al 2013). The spending on defense reached a high of about 42 % of the overall outlays in 1970 which was much higher than the average in comparison to budgets from the previous fiscal years. In the same year , around 7 percent of all the outlays was spend on net interest rates for the payment of accumulated debt by the federal government. However, this was lower as compared to previous fiscal years.

 During the 1980s, the Reagan Administration proposed an economic program that was aimed at reducing the taxes and government spending in proportion to GNP of the economy.  However, the proposals did not materialize, and in the first 3 years, government spending rose to a higher level than any other peacetime levels. The government spending was reduced in 1990s through the various budget cuts that were aimed at curtailing the rising rate of inflation. During the 1990 fiscal year, federal government expenditure including the federal debt interest declined to a low of 21.8 % of the country’s GDP. The spending had reduced to 18.4 % by 2000 and the drop was supported by various factors. These includes military spending cuts after the Cold War had ended and fell to $294.5 billion in 2000 from about $ 299.3 billion spend during 1990 (Morgan et. al 2013). There was also an improved economic growth and while program spending became increasingly restrained and a reduced federal debt. There was also a push by the Congress and the House of Representative for a more restraint on public spending which was done successfully and there a slight reduction in percentage of GDP.  The spending was to increase again in 200-2002 period recession as a result of increased welfare cost to about 3.1 % of GDP which then reduced to 2.5 % by 2007 fiscal year.  The 2009-10 Depression led to another explosion in welfare expenditure and this later stagnated to about $1,084 billion by FY 2016.

Federal budget deficit

 The government deficit has also been an issue in the budgeting process. The deficits include the item that has been derived from the government revenues and the government expenditures. A decline in tax revenues especially for the corporate taxes in 1970s and 1980s, and which could not be matched by the decrease in expenditures growth, the deficit on federal budget started increasing.  The reduction in tax rates was higher in 1980 than in 1979 and failure of the Reagan Administration proposals to succeed saw an increase in the level of deficit. By 1983 fiscal year, the percentage in deficit was almost 6 % in overall GNP. The big cuts in taxes lead to gaps in the budget and such gap can also be attributed to the 1981-1982 recession. In addition, a 30 percent increment in defense spending during the period also led to an increment in the budget deficit (Skolnik & Dales, n.d). While focusing on the recent over 32 years, the government budget has experienced deficits in about 28 times and budget surplus occurred for only 4 years, that is, 1998-2001. The surpluses could mostly be attributed to increased government revenue from a bubble stock market.  The biggest deficit to be recorded happened in 2009 and was about $1.4 trillion, at the time the economy was experiencing a recession. In relation to GDP, the largest fluctuations could be attributed to wide shifts in government spending, and interestingly, the largest increases and deficits have occurred when the U.S was at war.  

 For the year 2009, the deficit can be attributed to a deficit spending in combating the financial crises experienced in 2008 and a reduction in tax collections.  The above discussion  indicates the since 1987, the deficit has remained quite lower than increment in the debt and this is due to borrowing by Congress from an excess in Social Security Trust Fund.  The excess in this Fund is attributable to the generation of baby boomers whereby during their 20a-30s, the proportion of working people in population was higher than the retirees (Hyman, 2014). In essence, contributions in form of payroll tax were higher that expenditures on Social Security. During Reagan administration, a total of $ 1.412 trillion in form of deficit was added and this almost doubled the national debt. To fight the 1982 recession, he reduced the top rate of tax income to 28 % from 70 % and corporate rate to 34 % from 48 %.  In addition, the deficit rose as a result of more government spending by over 2.5 % during the same fiscal year, which comprised of Medicare expansion and defense budget increment.   The budget deficit was later reduced to $ 1.03 trillion in a single term of George H.W. Bush presidency while responding to the Invasion of Kuwait by Iraq. A bailout of $125 billion ended the Savings and Loan crisis of 1989 (Hyman, 2014).

Since the increase in 2009 budget deficit, the trend has been a falling national deficit over the recent years. However, on average the deficit in Obama’s administration was quite larger in comparison with previous administration at -5.8 percent of GDP. In 2016 fiscal year, the federal deficit was about $ 558 billion when adjusted for inflation.  For the year 2015, the deficit had decline to about 3 %, and a recent trend in deficit reduction can be attributed to the boost of increased spending and increased tax rise especially in 2013.  Even the smallest yearly deficits add to national debt as indicated in Gross debt that increased to around 103 percent of GDP. Almost two thirds of this debt is being held by non-governmental agencies and other agencies such as Social Security Administration.  Federal Budget deficits influence the economy and are also influenced by the economy. A weakness in the economy makes the government to increase the some specific spending programs automatically and an intake of tax revenue reduces. The increase in the deficit acts as stimulus to the economy and in an economy that is growing stronger the opposites tends to occur, where tax revenues increases faster while reduction in spending programs reduces.  

Federal Government Budget trend in Dollars

References

Capital budgeting

1. Introduction

The problem of capital budgeting was formulated in 1955 by Lorie and Savage and it came to be recognized as a model of providing solutions for financing and investment problems (Salo, 2011) .Firms use capital budgeting as tool of evaluating viability of an investment project to be undertaken and in deciding between two or more options for investment projects. Determining whether benefits of an investment project are higher than the costs involved requires that a financial manager should have an estimation of expected cash flows relating to the investment. In case of a capital project, the process normally entails and estimation of costs and revenues of future periods. The financial manager has to also incorporate taxes into the said cash flows since this forms a basic part of future cash flows. This paper includes an analysis capital budgeting , the techniques and methods used in capital budgeting , importance of capital budgeting in decision making and risks management and illustration of capital budgeting for a company opening a new branch.

 The evaluation of the investment viability is done through various techniques that show the period and extent to which investors’ funds will be recovered and profit earned from the projects. These techniques includes payback period and discounted payback period approaches, net-present value, profitability index, internal rate of return , modified internal rate of return and average accounting returns methods. The decision made concerning capital investment affect organizations for years and hence there is a need for careful capital budgeting process. The various decisions made through capital budgeting process comprises of allocation of limited resources, buy vs. lease decisions and comparing various investments that have different lives. Capital budgeting process is also incorporated in risk management in firms since any investment decision made that is exposed to risks. This incorporation entails considering future cash flows, risks presented by such cash flows and the cash flows value.

2. Definition and theory

Capital budgeting refers to a process used by organizations or business in determining the merits of a specific investment project. It is a process in which organizations assesses its potential investment or expenses  that are quite large and such investments and expenditures include projects like  construction of new plants or a long-term venture. Firms constantly invest their funds in some assets and these assets yield cash flows and income which the firm may reinvest further into assets or pay to shareholders. The assets represent the capital of the company and capital investment indicates the investing in the company’s assets (Salo, 2011). Capital project refers to a given asset investment set considered to be dependent on one another and decision makers consider them together.  Financial managers in the company must evaluate investment decisions that relate to long-term assets and other such investments in the capital budgeting process so as to generate value for shareholders or owners of these assets (Salo, 2011).

 The consideration of the investment project  including  whether it should be accepted or abandoned as  a part of initiatives carried out by the business for the purpose of growth is informed by capital budgeting. Through determining the rate of return that will be generated by the investment, the decision is made.  The general notion involves the fact that capital in terms of long-term funds that  an organization raises are used in funding investments that will make it possible for it to generate income in a number of years in the future. In most cases ,the money raised for investing in such assets are not normally unrestricted or available infinitely and hence , the company has to budget how such funds are going to be invested (Besley & Brigham, 2013).

The people who normally generate capital budgeting project ideas are usually the employees, suppliers, customers and other stakeholders and such ideas are based on the experiences and needs of the organization and such groups of individuals. For instance, sales representatives may constantly hear from customers that they need of products having specific characteristics that are not found in the current products of the firm. The idea is represented to the management by the sales representative and the management evalutate whether the idea id viable through consultation with engineers and production department. If the idea is confirmed to be viable, the financial manager has to conduct an analysis of capital budgeting to make sure that the project will bring substantial benefits in line with the company’s value (Besley & Brigham, 2013).

3. Capital budgeting techniques

 The techniques used in capital budgeting depends on the industry but for every technique cash flow from every investment is determined and then uncertainty of the cash flows are assessed so as to evaluate  various investment projects and choose those projects that will maximize wealth. It is good to look into how well every technique used discriminates among different investment projects and finally getting projects that will achieve maximum benefits to the wealth of the owner. Various criteria should be met by the capital budgeting evaluation technique and this include; considering every  cash flow that is incremental from a particular  project in the future; take into account value of money overtime; take into account uncertainty related to the cash flow in the future; presence of an objective criterion for selecting a project (Clayman, Fridson & Troughton, 2012).  If a project is selected using the highlighted criteria, it will generally lead to maximum wealth for the owner.

1. Payback period technique

Normally the payback period of a specific project is normally the time running from the first cash flow for investing in that project until such a time when cash inflows of the project equals the starting cash outflow. This basically refers to the time taken by the project to return the initial money invested. The payback period is hence the period for capital recovery or the payoff period (Besley & Brigham, 2013). If the investment consisted of $10,000 presently and the returns are $5,000 after one year and $ 5,000 after 2 years, the payback period is therefore, 2 years.  This technique does not have a decision criterion that is well-defined and usually favors those projects having cash flows that are “front-loaded”.  For an investment, it will look better in relation to payback period immediately the cash flows are received regardless of how the later cash flow appears. An analysis using payback period is firm if break-even measure that seems to offer a measure of a project’s investment’s economic life measure in relation to payback period.  If the economic life is likely to surpass the payback period, the investment is more attractive and if the post-payback period is equal to zero, such an investment is considered worthless regardless of how short the payback period is (Besley & Brigham, 2013). This can be attributed to the fact that total future cash flows are not higher than the initial investment.  Given that the future cash flows are actually worthless currently that in future, a post-payback duration that adds up to zero means that current future cash flows value is lower than initial investment of the project.  This technique provides some suggestions about the project’s risks.  In a sector where the equipment becomes rapidly obsolete or where there is cut-throat competition, investments whose payback is achieved earlier are of higher value.  Since the payback technique does to how the specific payback duration, in which wealth is maximized, it cannot be used as the basic evaluation method for investing in long-term assets (Besley & Brigham, 2013).

1. Discounted payback period technique

This is a method that involves looking into how much time would be required for a project to provide returns for the initial investment while considering the TVM (time value of money).  Discounted payback duration refers to the time it would take for the first investment to be paid back in relations to discounted cash flows for the future.  It involves discounting every cash flow back to the starting of the said investment using a rate that point to future cash flows uncertainty and time value of the funds. The rate connotes the cost of capital and if the future cash flows cannot be certain, the cost of funds invested is higher (Besley & Brigham, 2013).  If the uncertainty is high, that cash flow is worth less presently, meaning that a greater rate of discount is utilized for translating into the current value.  The discount rate is a reflection of the funds’ opportunity cost and for a firm, that opportunity cost can be considered for capital providers who include owners and creditors. If the payback period is shorter, the techniques can be used successfully, even though determining how short is better is difficult. However, the breaks-even in relation to discounted cash flows at the point of discounted payback involves the point at which discounted cash flows adds up to invested funds (Besley & Brigham, 2013).

• Net –present value

This technique is quite common and can be used more effectively in carrying out investment evaluation. For calculation using net present value to be carried out, a calculation of the different between investment cash outflows (projected cost) and cash inflows (cash flows that are generated by the investment project) is done. This technique is quite effective since it utilizes an analysis based in discounted cash flows, and where a discounted rate is used to discount expected cash flows so that the uncertainty of the said cash flows can be compensated (Besley & Brigham, 2013). A case in example is where an investment project costs $ 5,000 presently and offers to repay 7,000 dollars in 2 years time with an opportunity cost being 10 % .To find whether the investment is viable involves a comparison of the $ 5,000 with $ 7,000 as the cash flow expected in 2 years. The current value future cash flow can be obtained as $7,000 / (1+ 0.10)² which results to $ 5,785.12 .Hence, a 5000 investment today will yield a cash flow that will be worth $5,782.12 in future.  The term “net” in shows that each cash flow regardless of whether positive or negative will be considered. A net present value that is positive means that the value of the company will be increased by the investment and such a return is more that what is needed to compensate for expected investment return. On the other hand, if the net present value is negative, it means that the value of the company is reduced by the investment since it is lower than capital cost and hence should be rejected.  If the present value is zero, it means that obtained returns are just sufficient to recover the capital cost involved in the investment project and to compensate for the uncertainty level for future cash flows of the investment and time value of money. The decision for the investment project in this case can be indifferent between accepting and reject it.

1. Profitability index

This technique utilizes information similar to the one used in NPV but in this case in form of an index. If the value of the profitability index is more than 1, it means that the investment produces more profits or returns that the cost involved (Clayman, Fridson & Troughton, 2012).

1. “Internal rate of return”

This is basically a discount rate used in determination of how much returns can be expected to be realized from a given investment. It is that rate of discount that occurs after an investment reaches a break-even or when the net present value if the investment equals zero. The decision rule in this case involves selecting a project with a greater Internal Return Rate than financing cost. The Internal Rate of Return refers to proceeds or average earnings per year (Besley & Brigham, 2013).  If the cost of financing is 5 %, the projects are not accepted unless this rate of return is more than 5 %.  An investment project will be highly attractive if there is a big difference between the internal rate of return and the cost associated with capital. When dealing with independent investment project, the decision rule is quite straight forward but can be quit tricky in the case of investments that are mutually-exclusive.

 There is a likelihood that two mutually exclusive projects will have  Net present Value (NPV) and Internal Rate of Return  that are conflicting and this means that one such project will have a lower IRR but at the same time higher Net present value when compared to another one. Such issues may result from original investments between two projects not being equal, but despite such issues, the technique is useful for business analyses (Besley & Brigham, 2013). A choice for a venture that has a greater net present value leads to maximization of shareholders wealth since a discount rate can be used for calculating various NPVs and obtain a completely varying conclusion.  Hence while using this technique to evaluate different projects, one may choose a project that will not maximize value. In relation to Net Present Value , if the best that can be done is to  have cash flows reinvested at the financing cost , NPV will assume the project at financing cost ( capital cost ) which is a bit reasonable. If the rate of reinvestment is taken to mean capital cost, the investment project will be evaluated on NPV basis and choose the one that will maximize the wealth of the owner.  The internal rate of return technique may not be fit if there is more than one change in cash flows resulting from investment project’s life (Besley & Brigham, 2013).

1. Modified Internal Rate of Return

This technique is utilizes the function of both cash flows pattern and reinvestment rate and greater reinvestment rates resulting to bigger modified rate of returns. In case the Modified Internal Rate of Return (MIRR) is larger than invested money, there is expectation of more returns that is needed and such an investment should be accepted. If the MIRR is less than financing cost, the expectation is that returns will be less than require hence, it should be rejected. If the return rate equals the capital cost, the expectation is that returns will be equal to returns required and indifference exists between rejecting and accepting the investment (Clayman, Fridson & Troughton, 2012.

• Average accounting returns

 This refers to a method of accounting that is used for comparing various capital budgeting calculations like IRR and NPV. This technique provides a fast approximation of an investment project worth during its valuable duration. In this case, calculation of Accounting Rate of Return is done through finding the average operating profits of capital investment before interest and taxes but usually before amortization and depreciation (EBIT) and dividing it with book value of the average total investment and the results expressed as percentage (Besley & Brigham, 2013). The decision rule for the project involves accepting an investment whose ARR equals or higher than the needed ARR. In there are investment projects that are mutually exclusive, the one that has highest ARR is accepted. However, this technique has various disadvantages since its basis is book value, but not market value and cash flows, and it does not take into account the TVM (time value of money )(Besley & Brigham, 2013).

4. Importance of capital budgeting

Organizations are affected by capital budgeting decisions for some years and hence careful planning is very essential. If the decision is bad, it can significantly affect the future operations of a firm and the timing of the decision is quite important.  Capital budgeting is an essential aspect of planning since it creates measurability and accountability of any business that wants to invest its financial resources in a specific project.  If the business does not understand the returns and risks involved in any given project, the management will be held accountable to its shareholders (Besley & Brigham, 2013). Moreover, if a firm lacks a mechanism of measuring or evaluating the effectiveness of the different investment decisions made, there are high chances that the business will not compete effectively in the market. The process of capital budgeting is therefore, a good measuring technique that firms can use in determining the long-term economic and financial performance of an undertaken investment decision (Besley & Brigham, 2013).

Decision based on capital budgeting affects the firms in the long term and more specifically, the future growth and cost structure.  If a resolution is made wrongly, it can be disastrous for the continued existence of a company in the long-run. If there are no investments on assets, the competitive position of an organization will be negatively influenced. It is a tool used by organizations to come up with and develop long-run strategic goals of a company, an important aspect given that a company’s ability to set goals important to its prosperity and growth.  It offers the business a capacity to appraise its investment and hence creating a platform for planning the long-term direction. Capital budgeting is essential in managing big amount of financial resources through a capital outlay (Besley & Brigham, 2013) .A thoughtful and correct decision since wrong decisions may lead to large losses and hinder the organization from earning profits out of other investments which were foregone.  The capital budgeting process assist a firm with an aim of expanding to look for new projects for investment and knowing how such investment can be evaluated provides a model for assessing the viability of new projects (Besley & Brigham, 2013).  The business is able to undertake those projects that will give it a competitive edge in an industry and hence improved profitability in the industry.

 In addition, capital budgeting assist firms in estimating and forecasting its future cash flows, which are the aspect that generate value for a business over a given period of time. The management is able to undertake a potential investment and project the possible future cash flows and these in turn assist in determining where to accept or reject the project. This also relates to uncertainty and risks that a business faces in the industry and overall market and capital budgeting comes in to help in evaluating the possible future outcomes. Business decisions made by managers are surrounded by big uncertainties and there is a need for a tool to measure investments decisions in light of the aforementioned risks and uncertainties (Besley & Brigham, 2013). Investment involves both the present and the future and capital budgeting helps management to evaluate how the investment to be undertaken can fair amidst possible risks. This especially true if the investment project is being undertaken over a long period of time because the longer the period for specific project the more uncertainties and risks it is likely to encounter.

Capital budgeting is important in a business since it act as a tool for transferring information required by owners and stakeholders.  From the moment an investment project is initiated as business idea to the time it gets to be accepted or rejected , management has to make many decisions and the information required for such a decision can be provided  through capital budgeting.  The process makes it possible to transfer the required information to the relevant decision makers with all levels of an organization. This includes transferring information to shareholders whose equity value is influenced by the investment decisions taken (Besley & Brigham, 2013).  The capital budgeting tool is also essential in maximizing the shareholders’ equity worth since decisions on fixed assets acquisition are informed by the information provided by this process. The process if also useful when it comes to monitoring and controlling of investment expenditures since through careful definition, the required expenditures and also research and development are identified. A venture may turn worthless if unnecessary expenditures are not monitored and controlled in a careful and effective process, a crucial aspect of capital budgeting (Besley & Brigham, 2013).

5. Capital budgeting in decision making
6. Allocation of limited funds

In many cases, investment decisions involve allocation of limited resources among various potential investments. Since funds are normally not enough for funding all the investments, a decision is needed to determine the investment to be given priority.  The kind of analysis needed for such decision depends on whether these investments are divisible or indivisible.  In this regard, a divisible investment refers to those whose funding can be partial and economic benefits created equals the funds invested (Petty et. al 2015). For instance, if the funding of an investment is only 50 percent of all investment, it will only result to 50 percent of returns. However, most investments are normally not divisible and hence, the whole investment has to be done before any benefits can be obtained. In such a case, an investment or a given group of investment is selected if they give the greatest net present value.  This kind of analysis assumes that after investments, there is not going to be a return on resources remaining (Petty et. al 2015).

1. Buy vs. Lease decision

 A capital budgeting process is used for comparing different methods of obtaining an asset whether an equipment or a machine. The asset can be obtained through purchasing using outside funds, with no outside fund or through leasing. Even though the asset can be obtained in different ways, the operating expenses, output level and other aspect are similar for the alternatives but such aspects are not normally relevant to a comparative analysis and hence, are not at all included.  In this analysis, the discount rate indicates the capital’s opportunity cost. The ranking of the cost in terms of present value is done to show the method of obtaining the asset and which alternative is going to give the least cost of accessing the asset (Petty et. al 2015).

• Comparison of investments that have different lives

Comparison of alternative investments that have different lives is a common problem in capital budgeting and to obtain accurate comparison of investments by use of discounted cash flows, there is a need to have the same lives of the investments (Droms & Wright, 2010). A replacement chain method may be used.  For instance, if a machine is to be purchased to replace one that is worn-out, one of the options may be buying a machine with a lifespan of 10 years and costing $250,000. Another option would be to buy an economy machine that is cheaper costing only $ 160,000 but lasting only 5 years. The first machine brings about $60,000 cash flows annually in 10 year duration; this is on the basis of net cash flow amounting to $ 350,000 in a period of 10 years. The present value for the machine will be about $ 118, 674  cash flow in present value which is way less than nominal amount since outflow is seen at the beginning but inflows occurs over the whole period and at the same time are discounted. On the other hand, the economy machine is bough at the start of the period while replacement is done at the end of 5 years with a similar one.

Hence, the life of this replacement chain equals that of the first long life machine. Higher present value will be generated for the first machine - $118,674 cash flow – than the economy machine - $ 109,327 cash flow. This means that the relative advantage for using the lifelong machine is greater than the economy machine. This shows the need of capital budgeting in deciding which assets having different lives that a company should invest in so that to obtain the highest possible benefit from such an asset. The analysis is important for management when carrying out investment decision so that to ensure that limited resources are utilized to purchase assets that will give maximum value for shareholders of a business.

6. Capital budgeting and investment risks

The decisions on capital budgeting made by a financial manager requires an analysis of every investment option or option. This involves considering future cash flows, risks presented by such cash flows and the cash flows value. When looking into investment opportunities available, the aim is to determine the project that will provide maximum value for the firm and hence maximum wealth of owners. When estimation is made on what it would cost to invest in a certain project and the future benefits, there is also coping with risks or uncertainty. The uncertainty emerges from various sources and this depends on the type of investment project  in question , the industry and circumstances under which a firm is operating (Baker, 2011). The risks may arise from economic conditions, market conditions and government policies involving tax rates, interest rates and even international conditions.  The source of uncertainties affects the future cash flows and for the purpose of evaluating and selecting among investment options that will give maximum wealth for shareholders, there is a need for assessing risks related to the cash flow of a project.  Evaluation of capital project involves measuring the concerned risks. Any financial manager could worry about investment risk since owners and creditors – who supply the capital – must get compensation for the risk taken (Baker, 2011). Theses financiers can either provide their resources to the firm for investment or they can choose to invest elsewhere. This shows the existence of an opportunity cost that should be considered and include what the capital suppliers could gain elsewhere for similar degree of risk. The cost of capital, therefore, includes compensation for risk taken and Time Value of invested money.  The reward for such risk is the premium or the extra return needed for compensating capital suppliers the risk they bear and amount of risk compensation is assessed by understanding that the company’s assets resulted from past investment decisions (Baker, 2011).

While investing in stock market, the providers of capital will also demand for the risk they have undertaken and the bigger the risks of a particular venture, the higher the compensation required and the higher the capital cost. The reward for time value for money involves compensation for expected inflation and time value for money can be represented using an interest rate that is risk-free.  The compensation for such risk refers to additional return needed since the future cash flows for the investment project are not certain (Baker, 2011). If an assumption is made that applicable risk involves stand-alone risk like in the case of small business that closely held, and the capital providers would demand a greater return, the higher is the stand alone risk for the investment. If it is assumed that involved risk is market risk for the investment and the capital providers would demand higher return, the marker risk for the project would be greater. The capital budgeting tools or techniques are available for managers as decision makers to evaluate and measure the risk of an investment project even though most of currently used techniques are subjective (Baker, 2011).

 Firms that employ discounted cash flow methods like net present value (NPV) and Internal Rate of Return are likely to use a single capital cost, but this can be dangerous when used for all investment project. What if a single capital cost was to be used for all projects; if they all have similar level of risk and capital cost used for such risk level is appropriate, there would be no problem. A problem would arise if single capital cost was to be used for projects with varying risk levels.  If the capital cost used is capital cost for average risk investment for a firm, the use of discounted cash flow methods will lead to unwise decisions (Droms & Wright, 2010). Such decisions include rejection of profitable investments having lower risks than average risk investment since the future cash flows were too much discounted. The other such decision include acceptance of investments that are unprofitable and with higher risk than average project since there was not enough discounting of future cash flows( Droms & Wright, 2010).  Hence, incorporating of risk is important in capital budgeting process but judgment based on high level of experience is more applicable than scientific risk incorporation methods. It is also possible to that ignoring a more technical analysis of and using a total subjective risk assessment in estimating cost of capital that will provide a better reflection of investment risks.

Selecting and screening of investment projects requires financial managers to estimate the anticipated cash flows for every project, appraise the level of risk for the cash flows and assess the contribution of every project to the value of the firm and hence, hence to the owners.  The budgeting process must incorporate risk in their analysis of the investment options for the purpose of identifying the ones that will offer maximum value for shareholders.  Risk is basically  involved in decision making process by using a capital cost that indicates the risk of the investment project .The risk that is relevant for appraising an investment project is the market risk and which is normally estimated by examining other companies’ market risk in the same industry as the intended investment (Droms & Wright, 2010).

The capital budgeting process is therefore, important in determining the risks that face various investment options and taking into account the options whose risk is worth taking. The investments that are relevant in terms of risk taken are those that providers of capital are assured of obtaining return on capital and profitability. There is not investment project that is free of risks and such risks may vary depending on the type of investment.  The different risks includes lack of timely payment of cash flow , risk of collapse of the investee  company  and the likely risk of management using the investment funds in startups or projects  whose risks are not easily covered.  Incorporating risks into the capital budgeting process is, therefore, important in minimizing losses for the investors. Risk adjustment can also be done in capital budgeting so that various investment projects can be compared under different situations in the market (Droms & Wright, 2010). Capital budgeting process carried out under uncertainty can be approached through different ways and in a broader sense if the decision based on capital budgeting is placed within risk management framework.

7. Capital budgeting in company expansion

Company expansion through opening a new branch is among the major projects that may be undertaken with an aim of value addition to organization. The reason for expansion may include improving the production capacity or targeting a specific market regionally or globally. Expansion efforts undertaken by a company involves large expenditures due to the need for fixed assets like acquisition of machinery, purchasing new equipments and vehicles and the construction of a plant. It also involves expenditures on revenue for the purpose of starting off operations and meeting other necessary requirements like transportation.  This requires an effective process of capital expansion in order to improve the whole timing of acquisition of assets, carrying out risks assessment and deciding the best investment options in terms of acquiring the appropriate assets (Petty et. al 2015).

Opening of the new branch would require a company to evaluate the decision in terms of the aimed returns from the expansion and any risk involved in investing huge amount of money in a new branch. It, therefore, involves identifying the needs for the facility in terms of evaluation of all the requirements. The decision making will therefore, involve evaluation of how much funds is required and how much is to be used in the new investments and the providers of such amount of funds.  Opening of the new branch will involve broadening of the existing line of products and even the market. The aim of expansion projects involves minimal risks since a company that has history of experience in the market can make cash flow estimation with certainty (Petty et. al 2015). This is unlike introducing a new product line or entering a new market.

8. Replacement project – Replacing old machine with new

Capital budgeting process is also an important tool in making decision on asset replacement, where the existing assets are replaced with new ones but which carries out the same function. During replacement, there is an expectation that cost of production reduction will be achieved rather than enhancing the sale of company’s products (Petty et. al 2015).

Example details

Facts: new machine

Purchase price - $ 380,000, Installation cost - $ 20,000, Depreciation period – 5 years

Old machine purchase cost - $ 240,000 - 3 years ago and depreciation 5 –year class rate

Additional $ 35,000 expected in current assets, $18,000 current liabilities for new machine

Tax bracket for the firm 40 percent for capital gains and ordinary income

 Possible sale price for old machine - $ 280,000

Cash flows

INCOME STATEMENT

Decision – since NPV is greater than Zero, accept the investment

9. Issues in capital budgeting

There are a range of challenges involved in capital budgeting return dimensions while increasing precision of related theory appears to obscure some primary issues in capital budgeting decisions.  The biggest challenges in the process relates to estimation of cash flows, timing of the cash flows and their uncertainty level. Little attention is placed on these issues in theory setting while much effort is focused on the importance. In analyzing cash flows in capital budgeting process , there should be a  joint consideration of return and risk as financial managers are using techniques such like discount rates that are risk-adjusted, certainty equivalents and the like in  recognition and adjustment for possible problems   of cash flows (Laux, 2011).  Another factor that complicates the process is Corporate Income Tax since it has an effect on cash flows and tax-related problems for decisions like replacement of equipment may be involved. One of the major challenges of all the issues comprises of behavioral and personal aspect in long-term allocation of capital (Laux, 2011).  These challenges have to be looked into by management since implications of capital budgeting covers almost all long-term investment decisions carried out by the firm.

References

Salo, A. (2011). Portfolio decision analysis: Improved methods for resource allocation. (Portfolio Decision Analysis.) New York: Springer.

Laux, J. A. (2011). Topics in Finance: Part VI-Capital Budgeting.

Besley, S., & Brigham, E. F. (2013). Principles of finance. Cengage Learning. 493-520

Clayman, M. R., Fridson, M. S., & Troughton, G. H. (2012). Corporate finance workbook: A practical approach. Hoboken, NJ: Wiley.

Petty, J. W., Titman, S., Keown, A. J., Martin, P., Martin, J. D., & Burrow, M. (2015). Financial management: Principles and applications. Pearson Higher Education AU. 409-415

Droms, W. G., & Wright, J. O. (2010). Finance and accounting for nonfinancial managers: All the basics you need to know. New York: Basic Books. 201

Baker, H. K. (2011). Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects. Hoboken: John Wiley & Sons. 11-14

MANAGERIAL ECONOMICS

Case study: ECCO A/S — global value chain management

Alternative A: Production project

With regard to the need of financing its production process of the company, it should be recognized that the various branches it has in China, Indonesia, Thailand, and Netherlands are the main distribution points. This is what kept it to be one of the leading leather manufacturing companies. Additionally, the core of the company’s product strategy is mainly based on the direct injection technology. Although several rivals in the industry tried to copy it, the management authority had the potential of performing various small tasks which in return not only improved the quality but also made it harder for others to imitate.

The production process of the company brands an image of a level of lifestyle and comfort is ultimately linked with fashionable high-end products. This enables the management authority of the company to retail prices which are relatively above the average for the mass market as well as within reach for several customers. Moreover, this is coupled the need of producing shoes of high quality with the aim of increasing its innovative activities (Finne & Sivonen, 2009).

Considering the cost and the revenue impact of this project and before embarking on financing it, the management authority needs to understand the company has been operating a fully integrated value chain production process of which about 80% of it carried in-house. Thus, the management of ownership of tannery operations is what will have the capacity of reflecting the company’s dedication to quality improvement so as to maintain a high-quality level of confidence and ambition (Skjott & Schary, 2007).

Alternative B: update marketing program

As noted above, the aim of improving the company’s production process is to make it compete favorably with other companies in the same industry as well as maintain higher profit margins. For that reason, for the purpose of updating its marketing program, the management authority basically prioritizes employee education and training as well as investing aggressively in career development, expatriation, developmental conversations, and vocational training (Finne & Sivonen, 2009).

Regardless of those considerations, it has been noted that somehow the ECCO is not a fashion brand to many customers and for that reason, it is not more appealing to fashion savvy.  The general assessment to local labor has become one of the decisive factors when establishing its operating activities in other states, particularly China. Therefore, it will be difficult to find competent workers who will match the company’s European values. For this reason, coordinating the general flow of materials, information, and people will also be difficult to undertake with the increase in distance from its corporate headquarters.

Moreover, before embarking on financing this project, it should be noted that the company has not been carrying out heavy marketing activities such as advertisement, personal selling, and so on thus giving its competitors the opportunity of saturating the market. Thus, taking this alternative means that the management authority will be forced to invest more in its marketing and advertising plan. This gives the company the ability to increase their brand recognition (Skjott & Schary, 2007).

Alternative C: distribution process

Venturing in improving the company’s distribution process will be aimed at lessening shipment time to tanneries and factories located in various branches. Despite that, the global production facilities of the company do not always correlate with the retail markets it usually serves. Although Japan, Germany, and the USA has been its main retailing markets, a large percentage of its distribution processes has been taking place outside these geographies. Additionally, this has the capacity of cost down the expenses the company could have incurred as well as decreasing the delivery time of materials.

In meeting the requirements of this project by using the finances allocated to it, it is clear that the company will have the potential of being exposed to several materials and access to various shoemaking technologies. In other words, the main objective of financing this project entails ensuring that the majority of the production activities have been accomplished in low-cost states. This has the potential of enabling the company to react to and changes in demand as a result of improving distribution channels (Skjott & Schary, 2007).

Best alternative and recommendations for it

According to the revenue and cost information, the production process is the best alternative the company ought to consider first before embarking on financing the other alternatives. Thus, this will assist the company to improve the quality of its products through manufacturing newer designs which has the capacity of competing with others in the market. Equally, amongst the three alternatives, the company should also take into consideration the best distribution channel to use. In line with this, outsourcing production will include a wide range of suppliers, cheaper redundancy, and lower cost through having a large network of suppliers (Skjott & Schary, 2007).

Likewise, the operating strategies of the company are established in pursuit of the business strategy, resources, and capacities that lie within its operations. Therefore, the management authority should ensure that they have prioritized reliability and quality. This will enable them to configure their supply chain to manufacture its products with specifications. This has the ability to offer huge flexibility as well as allowing the company to maintain and sustain highest levels of quality (Finne & Sivonen, 2009).

References

Finne, S., & Sivonen, H. (2009). The retail value chain: How to gain competitive advantage through Efficient Consumer Response (ECR) strategies. London: Kogan Page.

Skjott-Larsen, T., & Schary, P. B. (2007). Managing the global supply chain. Denmark: Copenhagen Business School Press.

Confidence level

Input variables:

 Mean = 100

Standard deviation of population = 15 and sample size = 50

Estimation standard error = 2.12

Probability for single tail for the confidence level = 0.05

Confidence interval; 96.51 lower limits, 103.5 upper limit

With 3.5 as the margin of error, there is 90 percent confidence level that the mean of the population is 96.5- 103.5

The confidence level means that the volume of the stock and its value will fall between 96.5- 103.5; it means that there is a higher likelihood that the parameter for measuring the volume of the stock will fall within the outline limits of the interval. Since the confidence level is high, it means that these parameters should be broader so that the confidence level is assured.  The decision makers would be interested in a confidence level of over 95 percent since it highlights the lowest and highest volume of stock that is currently available and in determining the movement of the stock in and out of the stock. It shows there are little chances of error for the level of stock in the store. It represents, to the decision, makers the level of certainty regarding the movement of stock.

Practical application scenario

Sigma Known – population mean hypothesis test

Sampling distribution’s Standard deviation can be calculated directly where standard deviation is know and the normal distribution that is standardized can be used to obtain a z multiple. This is easily done by using NORMSINV.  The p-value for every 3 potential test conditions can be calculated, and then compared with every alpha level to observe whether to reject the null hypothesis.

The inputs include Population mean of the Hypothesis, sigma (the standard deviation of the population),  n as the sample size , at X-bar (sample mean) 295 &It – where the right number of the situation is put , 50It – where the right number of situation is put, and 298 &It – where the right number of situation is put.

Estimation standard error calculations: 1.697

Statistic of the test (z) is 1.532

The results shows that for the given level of Alpha, H0 equals Alpa:  (0.01) one tailed, no rejection, H0: Mu is > 294, p is 0.94 one tailed,

H0: Mu &It; 294, p is 0.063 two tailed, no rejection, H0: Mu is 294, p is 0.126 no rejection.

 The estimate of the situation and at the given alpha level, H0 must be 0.05

Sigma unknown – population mean hypothesis test

The standard deviation of the sample can be used as an estimate I calculating sampling distribution’s standard deviation as the estimate’s standard error.  T distribution is used to obtain a multiple that corresponds the required confidence level. This is by use of TINV Excel function. The calculation of p for every 3 likely test conditions can be done and then compared to every alpha level to decide whether to reject the null hypothesis.

This involves; 1.1 &It – put the right situation number: 61&It – put the right situation number; 7.3 &It put the right situation number;

Standard error is 0.1356

t(test statistics) is 1.8443

d.f (degree of freedom: 59)

• no rejection

0.5         no rejection

One tailed

H0:Mu   &gt  = 7 

P-value = 0.965

One tailed

H0: Mu < =7,      no rejection

p -value = 0.035    rejected

One tailed

H0: Mu = 7   > no rejection

p- Value = 0.07         > no rejection

The situation must be 0.1 not rejected

Scenario 2

The sampling distribution of standard deviation is calculated using sample proportion hypothesis tests and normal distribution that is standardized  is used to obtain z-tester multiple. It uses NORMSINV excel function.

p-value for every likely test conditions is calculated and compared to every alpha level to decide whether to reject null hypothesis. The various inputs include;

0.4 – population proportion for hypothesis

0.4 – sample proportion

The right number of the situation is then put. Following calculations include;

0.09 as standard error

0.54 as z-test statistic

The result includes;

For the provided alpha level :

H0: P => 0.36

 P-value = 0.72

One tailed

The H0 for this situation should be 0.1

H0: P < = 0.35                      - no rejection

P-value = 0.28 -                      one tailed

H0: P = 0.35                        no rejection

P-value = 0.57                    two tailed

The H0 for the situation must be  0.1 not rejected , 0.5 not rejected.

Microeconomics research report

Article: U.S. consumer spending raises modestly, inflation cools

The article discuses a modest increase in consumer spending which is an indication of a steady growth in the economy and that the economy was on the rebound.  Consumer spending relates to the demand part of supply and demand which is the demand for the products supplied in the market. Consumer spending refers to market value of overall consumption by the consumer with a certain area of the market, over specific period and price level. It is the demand for the products in market that are bought everyday so as to satisfy the daily household needs.

The consumption includes both services and goods provided at the market place. The things that consumers buy on daily basis create the demand which in turns maintains production by firms (Sloman, Keith and Garrett, 5). Demand – consumer spending – is determined by different factors which include disposable income, income per capita, household debt and inflation. Consumer spending drives demand and is therefore, the major driving force of the economy (Mochrie, 253). These are the factors that affect the purchasing power of consumers and hence determining the demand level.

Consumer spending indicates the level of demand of goods and services in an economy which in turn determines the level of economic activity any economy. Consumption of goods and services drives the production activities of the economy and the operations of firms in United States. In United States, the economy is majorly driven by the behavior of consumers in terms of their spending habits. Increased consumer spending means that they are in a good financial position and hence, more demand for goods and services and eventually the gross domestic product of a country (Mochrie, 253).  A decrease or down turn in consumer spending may lead to damages in the economy since a decrease in consumer demand means a slow economic growth. On the other hand, if the demand of goods and services exceeds the ability of firms to produce goods and provide services there will be an increase in prices.  Higher increase in prices leads to inflation (Mochrie, 253).

The government uses various policies to influence consumer spending which in turn affect the aggregate demand for products in the economy. These involve interest rates and taxation. Interest rates refers to the amount that a lender charges a borrower for using some assets which include money, large assets and even consumer goods (Baumol, and Blinder,538). The government determines the interest that banks charge on loans by capping the inter-bank rate. This determines the rate at which the money in the marker is lend to borrowers both institutional and individuals. Taxation is the tool used by the government to generate revenue and influence the economic growth of a country.

The government can increase or decrease the interest rates so as to raise the level of consumer spending or reduce the spending level. This is in turn affecting the behavior of consumers in regard to saving or spending of the income at their disposal. An increase in the rates of interest makes the consumers to reduce their spending and save more of their income while a decrease in the rate leads to more spending among the consumers.  The motivation to save can be attribute to the understanding that there will be higher return rates and more spending is driven by more purchasing power of their money (Baumol, and Blinder, 538).

In order to influence the consumer spending habits, strategies adopted should focus on consumer buying behavior. These include marketing campaigns and using high quality to provide value for their money. Marketing campaigns involves communicating a certain message to customers to present the benefits of various services and products from the business (Boone & David, 173). This involves showing the consumers various materials aimed at promoting the products or services by holding their attention to bring about the influence. Marketing involves communicating to the consumers on how a product will address their needs and providing the ways in which such products are better than others in the market. It also involves communicating to the consumers on the experience they could achieve for using the products and hence making them to spend more. Provision of high quality products includes offering a product at lower price while not compromising on the value (Boone & David, 173).

Marketing efforts helps in influencing the decision to be made by customers and when done on regular basis they make a person to opt for a certain product. Others may indulge in frivolous buying due to the marketing campaigns and this increases their spending (Boone &David, 173).. High quality will make the consumers to decide to buy the products due to value they are to gain from it. Even where the consumers had made up their decisions on buying, they can be influence to have quality for their money (Boone & David ,173)..

Conclusion

In the future, the government can be expected to influence the consumer spending or demand by changing interest rates and taxation policies to maintain constant growth in the economy. On the other hand, business will increase their marketing efforts through high quality products to influence consumer buying.

Works cited

Sloman, John, Keith Norris, and Dean Garrett. Principles of Economics (aus) Vs. Sydney: Pearson Education Australia, 2013. 5-6

Mochrie, Robert. Intermediate Microeconomics. London: Palgrave Macmillan, 2015. 253

Baumol, William J, and Alan S. Blinder. Economics: Principles and Policy. Mason, OH: South-Western/Cengage Learning, 2009. 538

Boone, Louis E., and David L. Kurtz. Contemporary marketing. Cengage learning, 2013.

173

Microeconomics

The Federal Reserve uses the monetary policy tools in an effort to influence credit price and therefore, promote the growth of national economy.  With the responsibility to set the monetary policy, the institution is mandate with promoting sustainable output in the economy and employment, and stabilizing prices (Lee, 2015).  The Fed is unable to use the tools in influencing production output and employment, and controlling inflation directly. In order to achieve this, it influences them indirectly through discount rates, operations in open markets and reserve requirement. By the use of the above tools, the Federal Reserve is able to alter the demand and supply for commercial banks reserve balances found at the central bank. Through this, it can influence the federal rate of funds, which is the banks’ interest rate for lending to other banks with reserves that falls below the requirement (Lee, 2015).

 While trying to stimulate economic growth, the Federal Reserve cuts the interest rate, so that the banks can lend money to business and individuals at lower rates. This leads to increased production output and creation of more jobs which increases employment.  Hence, when the Federal Reserve wants to improve economic growth, it increases the volume of money in the market which leads to low rates of interest (Sexton, 2015). When there is much money in the market, so that it leads to inflation, there is more demand for services and goods, and this means the products value inflates in proportion to value of money used to buy it. The Federal Reserve embarks on reducing the amount of money in the market by raising the rates to strike a balance between the money supply and goods or serves value.

The Federal Reserve policies are important since they also influence the stock market. The tools are used by the authority to affect employment and output over the short term and can also be necessary in smoothing out the general business cycle (Sexton, 2015).

Despite Weak Inflation, Fed Is Likely to Raise Interest Rates in June

This article suggests that the Federal Reserve is likely to raise the interest rates after the June meeting and supports this likely decision. The economy has been showing sign of weakness in the past several years, but the authority is likely to raise the rates even though the inflation is lower than desired. An analyst quoted in the article believes it makes sense to raise the rates and thinks that policy normalization policy in regard to the interest rates should continue gradually. This is because consumer spending had become strong, while unemployment continued to decline meeting the expectation set by the Federal Reserve (Appelbaum, 2017).

A Research and a recommendation on Career Advice to Potential Clients

            For students looking forward to make considerations on career options choosing a career path is one of the most important steps in life. Students can rely on their college counselors for guidance on academic experiences and career in order to avoid regrets in future. This letter is going to address and provide findings on career outlook in business and finance as one of the occupations listed in the occupation outlook handbook and we are going to specifically look at accounting and auditing profession.

            Job opportunities in business and financial operations are being projected with a growth rate of about 11% from 2014 to 2024. It is rated with the fastest rate compared to other occupations that is; adding around 632,400 new jobs (Bureau of labor statistics, n.p). A stronger environment is driving a need for more accountants and auditors to help in preparation and examining financial documents. The projected annual wage in business and financial occupations was $66,500 in the month of May 2016 and it was the highest annual wage compared to other occupations (Rupert & Kern, 4). The work of the accountants and the auditors is preparation and examination of financial records. They make sure that financial records are accurate, up-to-date and proper payment of taxes by following particular regulatory standards. They make assessments of financial operations so as to ensure efficient operation of the organization. Accountants prepare the following books; income statement, balance sheet and further than this, accountants perform other duties such as bookkeeping, taking track of revenues and expenses, they forecast future profits and cash flows (Occupational Outlook Handbook, 3). An accountant can be permanently employed by the company or even work for a third party hired to perform accounting duties for a company.

            On the other side, auditors come after accountants to verify the work done by the accountants. They inspect the financial statements to ensure that they represent the exact financial position of the company. Auditors make sure that the financial statements as released annually are presented in line the “Generally Accepted Accounting Principles”. This occupation requires at least a bachelor’s degree in order to be in an auspicious position that can make on successful in the labor market (Rupert & Kern, 3). The salary for new accountants and auditors is wide depending on level of education, size of the employer, or the geographic area. In 2015 the salary benchmarks were set by the big four firms and the range was between $ 40,000 and $ 68,000 Occupational (Outlook Handbook, 2009, 3). Thus, for firms that are planning to recruit more accountants and auditors, you must know it that their salary is also being projected to have a higher rise compared to other professions nevertheless, it is negotiable.

            To advise the students, accounting is not just a mere job but a profession that has even emerged the fastest growing. This growth is ongoing because as the economy experiences more growth many employees will be needed. Careers in accounting are open to both women and men of every background. This profession offers good income potential and stability that students may admire to have. One of the most necessary skills is that accountants and auditors have to be good with numbers (Rupert & Kern, 4). Implying it does not only rely on the working knowledge of multidimensional calculus but professionals in this field also need to be quick with quantitative analysis. Those who can get confused easily and make constant while working with numbers can find the career frustrating. Accounting profession even nonetheless has a number of job roles that one can specialize in most especially done in big firms, however, in small firms an accountant may perform all accounting tasks. We have bookkeeping accountants and auditors who are specialized in producing records for the company. Budget analysts help in preparing budget reports and monitor the spending of funds in an organization. Cost estimators on the other hand analyze the manufacturing of a product by evaluating the cost of the things required in the production. We also have financial analysts, management analysts, financial managers, and many others (Scarpati & Johnson, 14). Therefore, students may specialize in those jobs. Also, a few universities offer specialized programs for accounting and auditing. Students may also seek for more guidance from their specific counselors who may help to prepare them for careers in the profession. Therefore, for any student in this career, it is important that you meet the standards required by the college more so you must have achieved above the minimum grade.

Work cited

Readings:  Lesikar’s Chapter 11, pages 349 – 362  Sample letter Report, pages 360 – 361    Lesikar’s Appendix B, pages 608 – 611 

Bureau of labor statistics. (n.p)http://www.bls.gov/ooh/2

Scarpati, S. & Johnson, P. educationTeaching andAdvising a New

Generation ofAccounting Students.(2012)

Rupert, Timothy J, and Beth B. Kern. Advances in Accounting Education: Teaching and Curriculum Innovations. , 2017. Print.

Occupational Outlook Handbook, 2009. New York: Skyhorse Publishing, 2008. Print.

Kalecki Economics

The aphorism “capitalists earn what they spend while workers spend what they earn” was coined to show the class nature that exists in a capitalist society, and the difference between capitalist investors and workers. The difference is noted by the saving tendencies of the capitalists and workers. The economy is basically unequal in relation to economic power in a capitalist class.  The noted differences are derived from the fact that capitalists’ investments determine how many profits they own, while on the workers spend the residual that capitalists use to pay wages for the labor.

Since investors are part of the larger capitalist group which comes up with investment decisions, they form part of the innovation and volatility in a capitalist system. This means they determine income level and its distribution, and Kalecki’s model of income distribution helps in explaining the general capitalist system.  This model for income and expenditure distribution involves a closed economy with no government interference, where profits of an investment total is equal to what was spent by the capitalists. This is a simple model different from others which have to include trade surplus and government deficit for them to be complete (King, 2014).  This also means that employment that is normally generated by the investors as capitalists is normally a residual of what they have earned in terms of profit. It basically shows the relationship between distribution and accumulation, a relationship that was reinforced by Kalecki through a modernization of the modern scheme of production. If there is an increase in demand, the short term effect is the redistribution of income in the capitalist’s favor with little in workers favor (King, 2014).

In a closed economy that does not involve the government, workers will not have funds to save, and their aggregate income will depend on the willingness of the capitalists to invest and spend on consumption (King, 2014). The capitalist society is such that investors control and own production means, can easily access finance while the workers do not own anything but just their labor. Workers will spend all their income in consumption of goods or even services and by so doing, they only reproduce themselves. However, capitalists spend on a small part of their income in consuming goods or services, while saving the rest which they will later use in various investments. Given how spending habits of the capitalist are, they will get back what they spent in consumption of goods in terms of profits. By so doing their will restore the conditions that ensured they remain capitalists (King, 2014).  In this argument, some workers may save part of their income, but the number of such individuals who would result to saving is very few in comparison with the large number of workers.

Moreover, the amount saved by such workers was so inconsequential in comparison with amount saved by the capitalists that he perceived the workers savings that they did not require to be included in the equation (King, 2014).  The aforementioned phrase seems to portray Kalecki as trying to answer the question of whether consumption and investment by capitalists is determined by profits or vice versa. Capitalists have the power to determine how much they consume and invest while they are not able to make the decision of earning more. However, workers consume what they have and have to power to spend more.

Kalecki argued that the major obstacle to the employment of the whole workforce is investors or capitalists’ resistance to political changes that may result after full employment has been achieved and sustained with time.  If full employment is achieved, it would lead to political and social changes that would offer a new momentum to the opposition of the capitalists. As such, sacking someone workers would no longer play the function as measure of instilling discipline. The capitalists’ social position would be undermined, while there would be growth of class-consciousness and self-assurance of the working class.  Political tension would be created by industrial actions aimed at advocating for higher wages and improved working conditions (King, 2014).  To the business leaders, political stability and discipline in the working places or factories hold more importance than increased profits.  Hence, even though it is possible for full employment to be achieved, maintaining such a situation is likely to face big problems. Despite his optimism about the effectiveness of fiscal policy in reaching of full employment, Kalecki believed that these political problems make employment of the whole work force to be unsuited for a capitalism environment. In fact, his argument held that the doctrine of full employment is opposed a political background, and outlined various reasons why the industrial leaders are opposed to the achievement of full employment through government spending(King, 2014).  

These reasons include government intervention being generally disliked, especially in relation to creation of employment.  In absence of such intervention, the industry has much power over the government and the economic activity level and employment depend largely on the leaders in the industry giving them much power over that would be controlled by the government intervention. Another obstacle arises from dislike of certain elements of government expenditure especially in relation subsidizing mass consumption and public investment (In Halevi et. al 2016). In addition, the dislike of political and social impact of employment for the whole workforce is a major reason as aforementioned. After the above considerations, Kalecki sees a situation of full employment as being against the spirit of capitalism, unless there are fundamental changes to relevant institutions. In the case of full employment, new political and social institutions will have to be developed as a reflection of more power that is obtained by the working class (In Halevi et. al 2016). 

If capitalism system is able adjust and accommodate full employment, there will be required an incorporation of a fundamental reform in this system. As such, using fiscal reform to enable government intervention will offer a short-term solution (King, 2014). What are required are more basic changes to the political and social-economic structure in a capitalist society.  This explanation emphasizes the perception of the capitalists.  The outlined incompatibility is as a result of more basic aspect of relationship between the capitalist and the workers, since unemployment served as way of capitalists asserting their power and control over a given working class.  Moreover, there will always be significant employment and income fluctuations and governments will result to reacting during the time of depression but pursuing stable conditions for full employment will be impossible to achieve especially due to resistance for leaders in the businesses and industries (In Halevi et. al 2016).

References

King, J. E. (2014). Advanced introduction to Post Keynesian Economics. Cheltenham: Edward Elgar.

In Halevi, J., In Harcourt, G. C., In Kriesler, P., & In Nevile, J. W. (2016). Post-Keynesian essays from down under: Theory and policy in an historical context.

Denominations in the United States

The time before the twentieth century, the religious leaders never liked to be associated with the political class or anything to do with politics. Now the religious leaders are all over getting involved with the politicians and even campaigning for them from all corners of the world so long as they support their ideology. The ideologies they wanted to be supported by the politicians are that of gay rights, lesbianism, abortion and the development of private schools. In the late 1960s and early 1970s, the radical priests from the Catholic denomination spent time in the prison cells with the atheist political activist who had been jailed there[1]. The Roman Catholic bishops in 2004 requested the Catholics not to vote for the Roman Catholic Democrat but instead to vote for the already born again evangelical Republican since he was ready to say no to abortion laws. In the near future, it is most certain that the political class will now hold hands together with the religious leaders in order to get what both parties want. Mass media communication was and still is the trend for the religious leaders who want to make their policies and denominations known to the world. The internet has been the trend in the recent times and this has created the opportunity for the members of the society to even skip live church services and opt for the internet options.

Stories such as those in the western civilization are basically related to the occasion whereby they claim to be the descendants of Abraham through birth, obedience, or through adoption. The Western religion has always been in the fight with each party claiming to promote and also protect the understanding of Gods covenant. Some of the modern scholars have the ideology that monotheism is naturally violent mainly because of the drive for uniformity in regards to the beliefs and the practices. Judaism is one of the few and oldest type of religion worldwide[2]. Every western religion has some Judaism origin in nature. In the whole world, there are more than twelve million Jews in the world and half of that number has their origin in the United States. It is genuinely very difficult to identify a Jewish since what defines a Jew can be by birth, the cultures, or being so religiously inclined. When it comes to Christianity, what define a Christian are the doctrines and the beliefs[3]. Jews believe that the commandments were given to them by God and they follow every commandment accordingly as an obligation from God.

 Jews with Christianity had a good relationship compared to those of the Islamic world. All through the middle ages, the Jews had a rough time by being harassed by the Christian mob. During the thirteenth and the fourteenth centuries, England and France expelled all the Jews. Some went into Germany, Hungary, Russia, and others went to Poland[4]. This move, however, did not solve the issue of the Jews since in the Europe; the Jews were now being slaughtered alive and persecuted all over Eastern Europe during the nineteenth century. In Germany there was no rescue either, during the tenure of Adolf Hitler, the Jews again are being persecuted and his supporters started an anti-Jewish war that saw the stripping of the Jewish civil rights.

During this time, the Nazis had begun the shipment of the Jewish individuals into a concentration camp which had at least six million people including the slaves and other groups of people who were hated by the Nazis. In this concentration camp, all the six million people were brutally killed and others tortured to death[5]. In this era, it is suspected that there was more than half of the Jews death.  During the nineteenth century, Jews in Europe got the agitation to have their own country which will be a free nation. The Jewish nationalist held a movement to have their own nation and the move was headed by a man by the name Theodor Herzl who had tried to get the base at which the Jewish homeland would be agreed upon. 

After the Jewish realized that there were more deaths in Germany as ordered by Hitler, the movement became a strong one and which now engaged publicists and other major Jewish leaders. Forming a Jewish state was the best solution which would allow for the survival of the Jewish. In the United States, the Jews arrived early in the sixteenth century and settled in some cities. During the colonial period, the churches were established in a city called New Amsterdam, Savannah, and Charleston but the first official priest never came until the nineteenth century[6]. The orthodox unions in the United States were formerly founded by Dr. Mendes who was a Sephardic leader from the New York City. He had the hopes that the unions established would bring the people together under the same voice particularly the Jews. At first, the union based the care for the children but with time the move became for all members.

Non-denominational religion

My type of denomination is a non-denominational church. A nondenominational church is typically a church which has no affiliations with a larger denomination. The main essence of having a non-denominational church is to escape the rules that come along with being a member of a bigger denomination. Denominations are believed to be having some rules and regulations which are set to govern the church services[7]. The main benefit of being independent is the fact that there will be less or no interference in what the non-denomination church has prepared in any services. Looking at the bible, it is very clear that every church will be self-governed and that it will be answerable to God himself and not through another. Reading from the Bible, there is an indication of the establishment of new denominations which have been seen now but the event of having an authority with certain levels is a new thing which is not known to many[8]. Some can argue based on the point of Jerusalem council which is in the Book of Acts about the pattern for denomination continuous but there is basically nothing which indicates that idea.

For centuries, Christianity has been based on the denominations. Some Christians have chosen to not be affiliated with the denominations and prefer to be of a non-denomination. In the 1990s, less than 200,000 individuals had chosen to join the non-denomination churches but come the year 2008, there were more than 8 million people who opted to belong to the non-denomination religion. The origin of nondenominational religious is not very new or uncommon to the world today. The times we are leaving in today are a time of acceptance and tolerance[9]. The nondenominational churches are mostly dedicated to offering acceptance for every willing member disregarding from which denomination he or she comes from. The freedom from the harsh church doctrines the adherence to the normally outdated way of life acts as an attraction for the younger generations which chose to follow the nondenominational churches[10].  The lack of being labeled in most cases attracts members from other denominations who might have been labeled names and other sorts of words in the denomination churches. The old conventional ways of the church often push away the younger generations who are tired of leaving in the long forgotten beliefs of the religions.

Arguments have been put forward that the Christian church is meant for the nondenominational religion[11]. There are basically no divisions indicated in the Bible and according to Paul’s letter, it is clear that the Bible offers the salvation to everyone who does believe in it without regarding the denomination[12]. Versions of the same kind of people argue that the church should be united by God alone and not through the religions[13]. There are various reasons as to why people would choose to join the nondenominational religions in the world today. One of the major reasons is the turn of the churches into votes hunting grounds by politicians and the leaders if the churches. With this occurrence, many people now started drifting away from the churches and joining any other religion which looked more serious with matters to do with God[14]. After the World War II, a culture of development joined the world and this brought in new ideas and now the olden days were left behind by some members opening the way for the nondenominational religions.

References

Top of Form

Atwood, Craig D., Frank S. Mead, Samuel S. Hill, and Frank S. Mead. 2010. Handbook of denominations in the United States. Nashville: Abingdon Press.  

Rhodes, Ron. 2015. The Complete Guide to Christian Denominations: understanding the History, Beliefs, and Differences. [15]

Thompson, Scott. 2015. The design of a non-denominational church in Diepsloot.

Bottom of Form

[1] Atwood, Craig D., Frank S. Mead, Samuel S. Hill, and Frank S. Mead. 2010. Handbook of denominations in the United States. Nashville: Abingdon Press.  

[2] Atwood, Craig D., Frank S. Mead, Samuel S. Hill, and Frank S. Mead. 2010. Handbook of denominations in the United States. Nashville: Abingdon Press.  

[3] Atwood, Craig D., Frank S. Mead, Samuel S. Hill, and Frank S. Mead. 2010. Handbook of denominations in the United States. Nashville: Abingdon Press.  

[4] Atwood, Craig D., Frank S. Mead, Samuel S. Hill, and Frank S. Mead. 2010. Handbook of denominations in the United States. Nashville: Abingdon Press.  

[5] Atwood, Craig D., Frank S. Mead, Samuel S. Hill, and Frank S. Mead. 2010. Handbook of denominations in the United States. Nashville: Abingdon Press.  

[6] Atwood, Craig D., Frank S. Mead, Samuel S. Hill, and Frank S. Mead. 2010. Handbook of denominations in the United States. Nashville: Abingdon Press.  

[7] Rhodes, Ron. 2015. The Complete Guide to Christian Denominations: understanding the History, Beliefs, and Differences.

[8] Rhodes, Ron. 2015. The Complete Guide to Christian Denominations: understanding the History, Beliefs, and Differences.

[9] Rhodes, Ron. 2015. The Complete Guide to Christian Denominations: understanding the History, Beliefs, and Differences.

[10]

[11] Thompson, Scott. 2015. The design of a non-denominational church in Diepsloot.

[12] Rhodes, Ron. 2015. The Complete Guide to Christian Denominations: understanding the History, Beliefs, and Differences.

[13] Rhodes, Ron. 2015. The Complete Guide to Christian Denominations: understanding the History, Beliefs, and Differences.

[14] Thompson, Scott. 2015. The design of a non-denominational church in Diepsloot.

[15]

 Theory of Transaction Cost Economics

Introduction

What is theory?

Transaction cost is any payment that is given out in an economic exchange. Transaction cost can be used to study the planning and research of property. Transaction cost theory helps to explain the institutional change. These costs provide tools that aid in learning about institutions and comparing how theories are arranged.

Boundaries of theory

This theory is based on the planning and research of property, importance of planning and also the structural appearance of institutions in the transaction cost economics.

Variables, constructs and relationships.

Since the interest has increased in transaction cost economics based on the theory. This mostly in planning and property researches are not common to happen. The reason for the study is to expound on the size, distribution and existing of transaction cost. It does not show the exact numbers of the costs or the amount.

This makes it almost unattainable since the cost are hidden, not direct and are not given quantity by those involved in developing the process. The planning practice plays an important role in land use decision that is by identifying useless costs. The identification of the loss of money will enable in planning efficiently. The evaluations can be done in policy and institutions. Also there is the structural nature of the institutional and transaction costs which are divided into levels of operation. The focus is on the levels at which transaction cost will be produced.

In conclusion, this theory is excellent since it gives the development process that is by planning well on the decision making process (Buitelaar & Wiley, 2007).

Case assignments

Case1

In this case the author is using qualitative approach since the argument here is inductive in that it has a constructed reality. The involvement of the decision makers in practicing the managing of quality that brought about many doubts on which practice to be given more weight. This lead to construction of a framework for the quality management and the Infrastructure for a better use. This uses two analysis concepts such as path and multiple regressions that are used to test models as well as coefficients. The weak links are removed and also the model shows quality market results that are related statistically. The measures of quality performance have competition. Infrastructure includes managing the support and labour force. The difference in quality management leads to succeeding of different qualities.

In this case the researcher could also use pragmatic approach which has mixed methods. We should follow the life cycle so as not deviate from the objective. The objective might not be fully covered and the flow of the research of the theory would not connect if we do not follow the life cycle (Flynn, Schroeder & Sakakibara, 1995).

Case2

In this case the Author uses quantitative approach; this is shown by the use of data in numerical form. The statistics can be used to make conclusion. The author tries to explain the factors that determining system usage and their corresponding demerits.

The factors  have some functions with their disadvantages. For instance Behavioral intention shows predictions by resolving the differences between beliefs and other characters. This is known as a way of determining behaviors such as use of system which also has some disadvantages. The author points out some of limitations according to behavioral intentions, behavioral expectations and facilitating conditions in the use of system by giving better ways to use it.

The author could have also used pragmatic research approach to explain the theory of determinants of behaviors. This approach is free to explain a theory in a mixed up way in that it can use any of the approaches therefore the author has the freedom using it in their research. Since the their no limitation in the use of pragmatic approach the author has the power to expound on the theory in many ways. Here techniques of different nature could be used.

In conclusion, following the life cycle aids in the flow of the research of the author thus giving the good connection of the ideas (Venkatesh, Brown, Maruping & Bala 2008).

Case3.

The author uses qualitative approach to explain the influence of leaders’ behaviors to those that happen to be on their side. This is shown on the article by the author. The leaders should be good example to others, united, guide and also involve people in the governing.

Participatory approach could also be used to explain leaders’ behaviors in their governing process. The use of this approach would enable to respond to certain situations that are favorable to people.

In conclusion, the life cycle is followed for the flow of the research in that if there is no life cycle the theory would not convey the message in the right way (Huettermann, Doering & Boerner 2014).

Reference

Buitelaar, E., & Wiley InterScience (Online service). (2007). the cost of land use decisions: Applying transaction cost economics to planning & development. Oxford: Blackwell Pub.

Flynn, B. B., Schroeder, R. O., & Sakakibara, S. (1995). The Impact of Quality Management Practices on Performance and Competitive Advantage. Decision Sciences, 26(5), 659-691.

Huettermann, H., Doering, S., & Boerner, S. (2014). Leadership and team identification: Exploring the followers' perspective. Leadership Quarterly, 25(3), 413-432. doi:10.1016/j.leaqua.2013.10.010

Venkatesh, V., Brown, S. A., Maruping, L. M., & Bala, H. (2008). PREDICTING DIFFERENT CONCEPTUALIZATIONS OF SYSTEM USE: THE COMPETING ROLES OF BEHAVIORAL INTENTION, FACILITATING CONDITIONS, AND BEHAVIORAL EXPECTATION. MIS Quarterly, 32(3), 483-502.