# Capital Budgeting Strategies

Topics: Net present value, Internal rate of return, Present value Pages: 3 (851 words) Published: December 9, 2012
Capital Budgeting Strategies
University of Phoenix
Strategic Financial Management
FIN 486

Capital Budgeting 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 | 5,455,438 |
| Net present value| (3,680,709)|

As shown in the present value table, the NPV of the capital project equals -\$3,680,709 that means the project will result in the decrease in the wealth of the company’s shareholders, resulting in the opposite of the wealth maximization concept (Gitman, 2009). The analysis as according to the proposal completed for 10 years that involves the expected economic life of the new factory. At the end of the economic life of the new factory, the cash flow includes the \$14 million expected recovery from selling the...