Strident Marks can utilize the capital budgeting to evaluate their proposed long-term investments. Once we have identified a list of potential investment projects, the next step in the process will be to estimate the expected cash flows and risk of each project. Based on these estimates, we can evaluate each project and decide which set of projects are the best for Strident Marks to undertake. The primary decision methods used to evaluate the projects will be payback, net present value, and internal rate of return(Gallagher, 2003).

The simplest capital budgeting method is the payback method. The analyst must calculate the number of years it will take to recoup the project's initial investment (Gallagher, 2003). This is done by adding up the project's cash inflows one year at a time until the sum equals the amount of the project's initial investment. The number of years is the payback period. To evaluate this method, the manager must have in mind a particular number of years that is acceptable to the firm. If the payback period is less than or equal to that predetermined number, then the project is accepted.

Payback Method for Strident Marks Project
Period
0Initial Investment-$10,000
1Cash Flow$7,500
Remaining-$2,500
2Cash Flow$7,500
Remaining$5,000
3Cash Flow$7,500
Remaining$12,500

Solution:
Payback (in years) =1 + (5,000/7,500)
Payback =1.67years

The decision rule for payback method depends on management's acceptable payback period. If the proposed project's payback exceeds the acceptable time limit, then the project is accepted. Otherwise, the project is rejected.

The problem with the payback method is that this method does not consider cash flows that occur after the payback period, nor does it consider time value of money (Gallagher, 2003).

The second method that Strident Mark's can utilize to analyze the worth of its impending project is to use the net present value (NPV). NPV 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...

...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...

...WHAT IS CAPITALBUDGETING?
1.
2.
Decision making process of selecting and evaluating longterm investments. Examples include the decision to replace
equipment, to develop new product, or to build new shop at
a new branch of operations.
It is very crucial for companies to make the right decisions
because these projects require a huge amount of cash
outflow committed for many years. A right decision will
increase the firm’s value as well as the...

...
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 capital...

...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...

...CAPITALBUDGETING
PRINCIPLES
Capitalbudgeting is the process of evaluating and implementing a firm’s investment opportunities, by virtue of properly identifying such investments that are likely to enhance a firm’s competitive advantage and increase shareholder wealth. A typical capitalbudgeting decision involves a large up-front investment followed by a series of smaller cash inflows. A typical...

... 09/05/2014
A - Capitalbudgeting is an analysis of potential additions to fixed assets, it is part of the long term decisions taken by the top management and involve large expenditures. The capitalbudgeting is very important to firm’s future. The difference between capitalbudgeting and individual’s investment...

...The Basics of CapitalBudgeting
Integrated Case Study
Allied Components Company
You recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler, Chrysler, Ford, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it...

751 Words |
4 Pages

Share this Document

Let your classmates know about this document and more at StudyMode.com

## Share this Document

Let your classmates know about this document and more at StudyMode.com