Capital Budgeting Scenario
Proposal A: New Factory
A company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:

•Building a new factory will increase capacity by 30%.
•The current capacity is $10 million of sales with a 5% profit margin. •The factory costs $10 million to build.
•The new capacity will meet the company’s needs for 10 years. •The factory is worth $14 million over 10 years.

On the current proposal for building the new factory below will explain the analysis needed for the projection of the incremental cash flows that will be used for the NPV analysis. Building of a new factory will increase the capacity by 30% which is 3 million a year. With the estimate of profit margin at 5% this is equivalent to $150,000.00 in gross margin. At the end if the analysis the factory worth is 14 million. The net present value is computed below using the 10% average cost of capital being used for the cost of the new factory: Year| Cash Flow| PV Factor| Present Value|

According to the following calculations the net present value for this project is negative $3,680,709. This is not a positive outcome for the company and they even may want to...

...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 Technique
MGMT-3004-04 Financial Management
CapitalBudgeting Techniques
Capitalbudgeting is one of the most important decisions that face a financial manager. There are many techniques that they can use to facilitate the decision of whether a project or investment is worthy of consideration. The four that will be covered within this paper are Payback Rule, Profitability Index, IRR and NPV. Each method has its strength and weaknesses and they will be examined to determine which method is superior to the rest.
The first method to look at is Payback Rule. This rule is designed to show how long it will take to recover the cost of investment for the firm. This investment rule specifies a certain number of periods as a cutoff for determining whether to invest in a project. All investment projects where the initial investment cannot be recovered in specified cutoff period are unacceptable under this rule no matter what they provide past the cutoff. It is the easiest of all the methods to use and understand that will be reviewed. An example of this method is list in table 1. Now if we look at this table we find that if we use two periods as the cutoff then only Project B would be accepted for Project A does break even until year three. The problem with this method is that Project B breaks even but does not provide any income for the firm where Project A would...

...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...

...CapitalBudgetingScenarios
Shannan Coleman
FIN/486
September 23, 2012
Sal Sadiq
CapitalBudgetingScenariosCapitalBudgeting: Proposal A – New Factory
Proposal A is to build a new factory to decide if this would be a feasible move for the company they need to perform a net present value analysis. To do this they will only need to look at the incremental cash flows, which are as follows:
1. Initial investment of $10 million that will be the cost to build the new factory.
2. Sales of $3 million a year that will result in an increase of $150,000 in gross margin giving the company a 5% gross margin.
3. Value of salvage at the end of the life of the project of $14 million.
NPV Computation
The following table displays the NPV computation with a 10% weighted average cost of capital for this project.
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 |...

...CAPITALBUDGETING
The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.
Also known as "investment appraisal."
Generating investment project proposals consistent with the firm’s strategic objectives;
Estimating after-tax incremental operating cash flows for the investment projects;
Evaluating project incremental cash flows;
Selecting projects based on a value-maximizing acceptance criterion; and
Continually reevaluating implemented investment projects.
* Since CASH is central to all decisions of the firm, the expected benefits to be received from the project is expressed in terms of Cash Flows and not income flows. Cash flows should be measured on an incremental, after-tax basis.
* a) include all cash flows that occur during the life of the project
* b) consider the time value of money
* c) incorporate the required rate of return on the project
* The minimum rate of return needed to induce investors or companies to invest.
* The minimum acceptable rate of return at a given level of risk. Different investors have different reasons for choosing their required returns. Normally, it is determined by a person's or institution's cost 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
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
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...