Problem 23A
For the base-case scenario, what is the NPV of the plant to manufacture lightweight trucks?
Bauer Industries is an automobile manufacturer. Like any other company, the management team is considering making an investment and must consider all aspect before accepting a proposal. Bauer Industries must evaluate their proposal to build a plant that will manufacture lightweight trucks. The company has set a 12% cost of capital. IT is important that the proposal has positive NPV or it will not be a smart business move for Bauer Industries.

NPV is defined as the difference between the present value of its benefits and the present value of its cost. The formula used to calculate net present value is NPV=PV (benefits)-PV (costs). Many companies consider the formula the golden rule for financial decision making. Decision makers look for positive NPV or the investment is not considered. In this case, the NPV of the plant to manufacture lightweight trucks is positive. NPV=-150 x 36 x 1.12(1-11-12x9)+481.12x10=57.3 million

Problem 23B
What is the NPV of this project if revenues are 10% higher than forecast? What is the NPV if revenues are 10% lower than forecast?
Sensitivity analysis is another great capital budgeting tool to use when evaluating investments or making business decisions within a firm or company. If a company use the sensitivity analysis, the company are able to divide the NPV calculations into different groups of assumptions. This process then will show how NPV varies to change. This can either be positive or negative. While Bauer Industries are considering this venture, they are smart to be uncertain about their projected assumptions when in reality their forecast could generate totally opposite results.

The sensitivity analysis also gives data that can be used to determine which assumptions are most important. This will allow Bauer Industries to invest and refine...

...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 Strategies
University of Phoenix
Strategic Financial Management
FIN 486
CapitalBudgeting Strategies
Week Four of Strategic Financial Management discusses the chosen provided information for the proposal that concerns building a new factory and includes the incremental cash flows needed for the net present value, (NPV) analysis. The incremental cash flows identifies sales of $3 million a year that equals an increase in gross margin of $150,000 given a 5% gross margin and initial investment of $10 million that includes the cost of building the new factory (Gitman, 2009). The savage value at the end of the project life equals $14 million.
Given a 10% weighted average cost of capital, table 1 shows the computed NPV for the project.
Table 1
Year | Cash Flow | PV Factor | Present Value |
0 | (10,000,000) | 1.0000 | (10,000,000) |
1 | 150,000 | 0.9091 | 136,364 |
2 | 150,000 | 0.8264 | 123,967 |
3 | 150,000 | 0.7513 | 112,697 |
4 | 150,000 | 0.6830 | 102,452 |
5 | 150,000 | 0.6209 | 93,138 |
6 | 150,000 | 0.5645 | 84,671 |
7 | 150,000 | 0.5132 | 76,974 |
8 | 150,000 | 0.4665 | 69,976 |
9 | 150,000 | 0.4241 | 63,615 |
10 | 14,150,000 | 0.3855 |...

...CapitalBudgeting Decision Process
1. Introduction
The maximization of shareholder wealth can be achieved through dividend policy and increasing share price of the mark value. In order to derive more profits, our company shall invest potential investments which always cover a number of years. Those investments involve substantial initial outlay at the outset and the process. The management is responsible to participate in the process of planning, analyzing, evaluating, selecting and making decisions to allocate the limited resource to those investments. This is called capitalbudgeting decision process. Budgeting acts as an important managerial tool in practice. It is budget for the major capital investment such as purchase of land and building, plant and machine, investing new product or market. In modern competing environment, the company shall go ahead to make those investments in order to survive and profitability. A good evidence is Apple which globally introduced iPhone and acted as a leading market position. Denzil & Antony (2007) stated that “Those decisions shall take account of the amount, timing and associated risk of expected company cash flow”. Therefore, Capitalbudgeting decision process is within the prospective of financial management.
2. The Aims of Financial Management
Finance management generally embraces...

...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.[1]
Many formal methods are used in capitalbudgeting, including the techniques such as
* Accounting rate of return
* Payback period
* Net present value
* Profitability index
* Internal rate of return
* Modified internal rate of return
* Equivalent annuity
* Real options valuation
These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period.
Contents [hide] * 1 Net present value * 2 CapitalBudgeting Definition * 3 Internal rate of return * 4 Equivalent annuity method * 5 Real options * 6 Ranked Projects * 7 Funding Sources * 8 Need For CapitalBudgeting * 9 External links and references |
Net present value[edit]
Main article: Net present value...

...What are the missions of CERs and the capitalbudgeting process at Stryker?
Mission: Standardize and formalize the capitalbudgeting process. The CERs and capitalbudgeting process were implemented so that a more formal process of requesting capital expenditure and approving them would be applied. All this was put in place to support cash flow targets and maintain Stryker’s 20% growth benchmark.
To what extent have they been shaped by elements of corporate finance theory?
They are heavily influenced by corporate finance theory
All submissions are required to show the net present value (NPV), internal rate of return (IRR) and payback period.
They need to highlight the project’s anticipated outgoing cash flow and earnings effects on the company and describe specific risks that could affect the projects abitily to deliver projects economic results.
Specifically for mergers the CER would include financial analyses of “Best Case” and “Worst Case” scenarios which would include income and cash flow figures.
To what extent are they shaped by Stryker’s particular industry, history, and culture?
These factors play a role in shaping the CERs and capitalbudgeting:
Industry: With a growth in the medical industry and an aging baby boomer population Stryker would naturally see a growth. However to continue to achieve this growth a steady or...

...
CapitalBudgeting Case
Student Name
University of Phoenix
QRB501/Quantitative Reasoning for Business
Date
Professor Name
CapitalBudgeting
The authors of this paper will analyze and interpret the answers to the CapitalBudgeting Case Study presented in Week 6 material of the Quantitative Reasoning for Business course. The paper presents the rationale behind the Net Present Value (NPV) and Internal Rate of Return (IRR) results, describes the relationship between the two of them and explains the reasons behind the acquisition recommendation (e) in the Microsoft Excel spreadsheet.
Analyzing the Results
The case study presents two corporations (A and B) with different revenue values and expenses as well as variable depreciation expenses, tax rates and discount rates. Members of the team calculated both corporations’ cash flows, NPV and IRR values using a Microsoft Excel spreadsheet.
The net present value (NPV) of an investment proposal is equal to the present value of its annual free cash flows less the investment’s initial outlay. Whenever the project’s NPV is greater than or equal to zero, we will accept the project; whenever the NPV is negative, we will reject the project. (Keown, 2014. p. 310) On the other hand Keown (2014) points out that “the internal rate of return is defined as the discount rate that equates the present value of the project’s free cash flows...

...CapitalBudgeting Methods for Corporate Project Selection
In a 2001 Graham and Harvey survey of 392 chief financial officers (CFOs) asked “how frequently they used different capitalbudgeting methods?” Approximately 75% of the CFOs replied that they use net present value (NPV) or Internal Rate of Return (IRR) always or almost always (Smart, Megginson & Gitman, 2004, pg. 251). Projects are viewed as capital investments in the corporate world, and as such, are evaluated closely for their possible financial impacts on the “bottom line” due to their higher risk of failure. Capital investments are those that are considered long-term investments such as manufacturing plants, R&D, equipment, marketing campaign, etc., and capitalbudgeting is “the process of identifying which of these investment projects a firm should undertake” (Smart, Megginson & Gitman, 2004, pg. 227). According to Smart, Megginson & Gitman, there are three steps in the capitalbudgeting process:
* Identifying potential investments
* Analyzing the set of investment opportunities, identifying those that will create shareholder value, and perhaps prioritizing them
* Implementing and Monitoring the investment projects selected
This paper will focus on step two, and will discuss the strengths and weaknesses of the four most common methods...

...freezing capital expenses. Shrewdly, SAI continued its research and development efforts and developed the IC 1032, a specialized chip used in data embedded mobile phones (Scenario, 2008. University of Phoenix). Hal Eichner, SAI Chairman, has a two point strategy for the company; increase market share, and keep pace with technology by expanding the existing digital images market sharing and enter the wireless comminication market.
The first task on the agenda was to examine the probable future opportunities that could potentially accept the cash flows for SAI and its two potential projects were, Dig-Image and W-Comm. In addition, SAI's plans to make $54 million in its first year by selling at least 400,000 units. A detail analysis, will consider accomplishing this by focusing on the following types of synergy: (1) revenue enhancement, (2) cost reduction, (3) lower taxes, and (4) lower cost of capital. The premium paid for an acquisition is the price paid minus the market value of the acquisition prior to the merger. The premium depends on whether cash or securities are used to finance the offer price (Ross. 2005. Chapter 29, page 795).
Shareholders in organizations like to invest in projects that are worth more than they cost. "In capitalbudgeting, the profitability index measures the bang (the dollar return) for the buck invested. Therefore, it is useful for capital rationing (Ross 2005)....