BMW Bike is considering building a new plant. Juan Optimist, the company’s marketing manager, is an enthusiastic supporter of the new plant. Mila Pessimist, the company’s chief financial officer, is not so sure that the plant is a good idea. Currently the company purchases its skateboards from foreign manufacturers. The following figures were estimated regarding the construction of a new plant.

Cost of plant4,000,000
Annual cash inflows4,000,000
Annual cash outflows3,600,000
Estimated useful life15 years
Salvage value2,000,000
Discount rate11%

Juan Optimist believes that these figures understate the true potential value of the plant. He suggests that by manufacturing its own bikes the company will benefit from a “buy Filipino” patriotism that he believes is common among bikers. He also notes that the firms have had numerous quality problems with the bikes manufactured by its suppliers. He suggests that the inconsistent quality has resulted in lost sales, increased warranty claims, and some costly lawsuits. Overall, he believes sales will be P200,000 higher each year that projected above and that the savings from lower warranty costs and legal costs will be P100,000 per year. He also believes that the project is not as risky as assumed above, and that an 8% discount rate is more reasonable.

Answer each of the following questions:

a)Compute the net present value of the project based on the original projections. b)Compute the net present value incorporating Juan’s estimates of the value of the intangible benefits, but still using the 11% discount rate. c)Compute the net present value using the original estimates, but employing the 8% discount rate that Juan suggests is more appropriate. d)Comment on your findings.

Solution to Capital Budgeting Problem:

a)The net present value of the project based on the original projections.

...CapitalBudgeting
Part I
PV= FV / (1+i)^y PV= present value, FV= future value, i= discount rate, and y= time.
1a) If the discount rate is 0%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 0% -$400,000
1 $100,000 0% $100,000
2 $120,000 0% $120,000
3 $850,000 0% $850,000
Answer: The projects net present value is $670,000
If the discount rate is 2%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 2% -$400,000
1 $100,000 2% $98,039
2 $120,000 2% $115,340
3 $850,000 2% $800,974
Answer: The projects net present value is $614,353.45
If the discount rate is 6%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 6% -$400,000
1 $100,000 6% $94,340
2 $120,000 6% $106,800
3 $850,000 6% $713,676
Answer: The projects net present value is $514,815.59
If the discount rate is 11%, what is the projects net present value?
Year Cash Flow Discount Rate Discounted Cash Flow
0 -$400,000 11% -$400,000
1 $100,000 11% $90,090
2 $120,000 11% $97,395
3 $850,000 11% $621,513
Answer: The projects net present value is $408,997.46
With a cost of Capital of...

...
CapitalBudgeting Analysis Project
MBA 612
The General CapitalBudgeting Process and how it is implemented within Organizations
The general capitalbudgeting process is the tool by which an organization determines its choice of investments through analyzing and evaluating its cash in and out flows. The capital budget process is vital to the organizations mere existence. Capitalbudgeting decisions can mean the difference between the company’s survival and its extinction, especially in today’s volatile global economic environment. The goal of survival for an organization is to create the maximum amount of shareholder wealth. To achieve positive shareholder wealth, the organization must maximize its share price through creating a positive net present value. The organization cannot achieve shareholder wealth without the use and understanding of a solid capital budget process (Megginson, Smart, Graham, 2010).
Capitalbudgeting analysis is really a test to see if the benefits (cash inflows) are large enough to repay the company for three things the cost of the asset, the cost of financing the asset (interest) and a rate of return (Investopedia, n.d.).
The capital budget process involves three basic steps:
1)...

...
CapitalBudgeting
QRB/501
July 25, 2013
On this paper the reader will be able to find the rationale in the analysis of a specific capitalbudgeting case study. Definitions along with explanations related to capitalbudgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capitalbudgeting allows the companies to analyze one or more projects to decide eventually which project or piece of equipment would be most profitable or suitable (economically), according to the needs and the capacities the company has.
Before entering into the analysis a little further and into the company chosen let us define what Net Present Value really is. According to Business Dictionary (2011) the definition of NPV is “The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.” “NPV is considered as one of the two discounted cash flow techniques, the other one is the Internal Rate of Return”. There are different types of net present values such as the negative net present value (worse return), the positive present value (better return), and the zero net present value that basically means that the original amount...

...Capital Budget Recommendation
Anne Adams
University of Phoenix
Managerial Accounting and Legal Aspects of Business
AC543
Sean DAmico
August 20, 2012
Abstract
This paper will give a comparison between the various preferred capitalbudgeting evaluation techniques in the corporate business setting. There will be a recommendation given for the Guillermo Furniture Company based on the results of one or more evaluation techniques, which in turn will help direct the financial health of the organization.
Corporations are continually striving to improve the financial health of its organization and one strategic way many corporations are doing that is through capitalbudgeting. Capitalbudgeting involves choices. The choices revolve around projects that will add value to the organization. The projects can include acquiring land, purchasing a truck, or replacing old equipment. Many times, corporations are encouraged to undertake projects that will increase its profitability. The challenge is to find the appropriate evaluation method to bring the intended profitability into reality.
The three preferred evaluation methods that many corporations use are net present value, internal rate of return, and payback period. Many corporations often calculate capitalbudgeting solutions using all three methods. However, each method often produces...

...
CapitalBudgeting
FINC 620 - Financial Management
May 19, 2014
Introduction
According to Investopedia, capitalbudgeting is the process in which an organization decides whether certain large projects, such as building an addition or purchasing large equipment, are worth the investment (Capitalbudgeting, 2014). Ifcapitalbudgeting in not performed prior to a major purchase or beginning a large project, it could be detrimental to an organization. Because of the limited amount of capital that may be available to an organization at any given time, it is critical that company leaders utilize capitalbudgeting methods to make the determination which ventures will bring the company the biggest return on their investment. Among these capital budget methods are Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR).
Payback Period
According to Marty Schmidt, the payback period is the cash flow analysis metric that calculates the length of time for capital acquisitions or investments to pay for themselves, the length of time it takes to cover costs, or what is the investment breakeven point (Schmidt, 2014). The payback period is quite an easy financial metric, and is equal to the...

...Week 4 Discussion Question 1b
Introduction
Capitalbudgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the firm to recover the outlay of cash and the return the project will generate. Other models just basically employed the concept of the time value of money. We have seen that more current models are attempting to include their analysis factors that might significantly affect the decision made by the manager (Cooper et.al, 2001).
Recent studies have shown that capitalbudgeting decisions are highly important and most times complex. There are several reasons associated with the use of capitalbudgeting. First, capital expenditures require the firms to outlay large sums of funds to initialize the project... Second, firms need to formulate ways that will generate and repay these funds that were initially outlayed. Finally, having a good sense of timing , when using this model is also very critical when making financial decisions. Several alternatives models are commonly used when...

...Capitalbudgeting is used to ascertain the requirements of the long-term investments of a company.
Examples of long-term investments are those required for replacement of equipments and machinery, purchase of new equipments and machinery, new products, and new business premises or factory buildings, as well as those required for R&D plans.
The difficulty in making proper capitalbudgeting decisions arises as a consequence of the difficulty in determining the upfront costs, the periodic cash flows, even the proper WACC. All of these quantities must be estimated, and all of the ensuing estimates will contain some degree of uncertainty; the process in inherently risky.
The different techniques used for capitalbudgeting include:
• Profitability index
• Net present value
• Modified Internal Rate of Return
• Internal Rate of Return
Besides these methods, other methods that are used include Return on Investment (ROI), Accounting Rate of Return (ARR), Discounted Payback Period and Payback Period.
The different types of risks that are faced by entrepreneurs regarding capitalbudgeting are the following:
• Corporate risk
• International risk
• Stand-alone risk
• Competitive risk
• Market risk
• Project specific risk
• Industry specific risk
CapitalBudgeting and Risk
Uncertainties can...

...1
CapitalBudgeting Problem
MBA612, Dr. Schieuer
By: Dean Anderson, Terry Sutton,
Sawan Tamang, Karuna Mishra,
2
CapitalBudgeting Process: Capitalbudgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures (Sullivan & Sheffrin, 2003). The capitalbudgeting process involves three basic steps:
1. Identify potential investments
2. Evaluate the set of opportunities, choosing those that create shareholder value, prioritize
3. Implement and monitor the investment projects selected
The capitalbudgeting process begins with an idea and ends with implementation and monitoring. In this particular problem we are focusing on the second step in the process: analyzing the merits of the investment proposal to expand and simultaneously replace old equipment.
There are analytical tools that weigh the merits of investment projects on several dimensions. To decide which investments to undertake, managers need an analytical tool that: (1) is easy to apply and explain to nonfinancial personnel; (2) focuses on cash flow, not...