You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments, project X and Y. Each project has a cost of $10000 and the cost of capital for each project is 12 percent. The projects expected net cash flows are as follows:

a. Calculate each projects payback period, Discounted payback period, net present value (NPV), internal rate of return(IRR) and Profitability Index

b. Which project or projects should be accepted if they are independent?

c. Which project or projects should be accepted if they are mutually exclusive?

d. How might a change in the cost of capital produce a conflict between the NPV and IRR ranking of these two projects? Would this conflict exist if k were 5%?

e. Why does the conflict exist?

(a) Calculate each projects payback period, net present value (NPV), internal rate of return (IRR) and Profitability Index

...CapitalBudgeting Rules: NPV, IRR, Payback, Discounted Payback, AAR
Categories of Plans
1. Replacement Projects: decisions to replace old equipment – those are among the easier of capitalbudgeting techniques. It is important to decide whether to replace the equipment when it wears out or to invest in repairing the machine.
2. Expansion Projects: These are decisions whether to increase the size of business or not – they are more uncertain than replacement projects.
3. New products and services: These are decisions whether to introduce new products and services or not – they are more uncertain than both replacement and expansion projects.
4. Safety and environmental projects: These are the projects required by governmental agencies and insurance companies – these projects might not generate revenue and are not for profits; however, sometimes it is important to analyze the cash flows because the costs might be very high that they require analysis.
Basic Principles of CapitalBudgetingCapitalbudgeting usually uses the following assumptions:
1. Decisions are based on cash flows not income
2. Timing of cash flows is important
3. Cash flows are based on opportunity cost: cash flows that occur with an investment compared to what they would have been without the investment
4. Cash flows are analyzed on after-tax basis:
5. Financing costs are ignored because they are...

...
CapitalBudgetingCase
Andrea Spence
QRB/501
September 25, 2013
Prof. Walden Gemmill
CapitalBudgetingCase
It is important for business owners to analyze projects and their costs before going through with them In order to do this they must project the value of the project to see if it is going to bring them the profits they desire. For example, if a business owner is interested in taking acquiring a new company, he or she must look at different aspects of the company as it is now and project the value over several years to ensure that a profit will be made. In the case presented, two companies are being compared to see which would be the better company to acquire based on income statement and cash flow projections, Net present value (NPV), and Internal rate of return (IRR). This paper will go over the reasoning for the final decision based on the analysis of the projections as well as the importance and differences of NPV and IRR.
Income Statement Projections
Income statements are vital tool to use to see how a company is doing financially. The five year projections of both corporations gave a good sense of how they will grow over the period. At first glance Corporation A appears to be the better option just by a slight difference of $151 over Corporation B. However, it is important to look at other projections and factors when...

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CapitalBudgetingCase
Learning Team A
QRB/501 Quantitative Reasoning for Business
July 29, 2014
Dr. Larry Olanrewaju
CapitalBudgetingCase
Our Company has the opportunity to obtain another corporation. We have to choose between two companies, Company A or Company B. We only have $250,000 to spend to purchase the companies. Because of this financial constraint, acquiring both corporations is not an option. Therefore, we must determine what company would be better to acquire.
Company A
Company A started with $250,000 and increased in revenue by 10% each year up to 5 years. Therefore, at the end of 5 years the revenue totaled $146,410. We subtracted the annual expenses from the yearly revenue to determine the profit before depreciation or the profit before the drop in value. Depreciation moves the cost of an asset to depreciation expense during the asset's useful life. Depreciation expense results when the purchase price of a fixed asset is reduced over time, or its useful life (Keown, Martin, & Petty, 2014). In Corporation A, the Depreciation expense is $5,000 a year. We deducted the $5,000 year depreciation from the profit to obtain the profit before tax. The tax rate of 25% was deducted from the profit before tax to find the net income. The 5 Year Projected Cash Flow is the net income plus the $5,000 annual depreciation amount.
According to Brealey, Myers, & Marcus...

...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...

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CapitalBudgetingCase
Theresa Cruz, Jesika Watson, Sophina Lane
QRB/501
March 30, 2015
Melinda Gregg
CapitalBudgetingCase
Analyzing the Results
In the two capitalbudgetingcases corporations (A and B) have different revenues values and expenses as well as variable depreciation expenses, tax rates and discount rates. The members of our team had to compute both corporate cases NVP, IRR, PI, Payback Period, DPP, and project a 5-year income statement and cash flow in a Microsoft Excel spreadsheet. The future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project's cost of capital and its risk is what’s needs to forecast the investment. Next, all of the asset's future positive cash flows are reduced into one current value number. Subtracting this number from the original cash expense required for the investment provides the net present value (NPV) of the investment. Using the internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings.
Relationship between Net Present Value and IRR
Net present value of an investment is equal to the “present value of its annual free cash flow less the investments initial outlay” (Kewon 2013 pg 310). Whenever the NPV is greater or equal to zero we...

...CapitalBudgeting Mini Case
There are many different methods business owners use to efficiently analyze business investment. One of these effective methods is the calculation of the net present value or NPV. The second most effective method would be the calculations of the internal rate of return or IRR. There are also other useful methods as well, for example, the payback rule and the profitability index. Many business owners use the above procedures to help them in their decision making of acquiring other businesses.
“NVP is important to a project because if the cost of the investment is going to be, or is more than the revenue from that project, then it may be more cost effective to shut down the project all together rather than lose more money. If multiple projects are available, then it is wise to first calculate the NPV for each project, choose those that have a positive NPV, and reject the ones that have zero or negative NPVs. Moreover, the IRR method can be used, and generally, they should provide the same ranking of the projects because the projects with high NPV also tend to have high IRR (Hestwood, Lial, Hornsby, & McGinnis 2010)”.
“There are many reasons the IRR is imperative to a company. If the rate of return is insufficient, it means additional cash is out flowing from the company than is inflowing into the company. This could lead to negative working capital. The IRR is imperative for a company to...

...University of Phoenix Material
CapitalBudgetingCase
Your company is thinking about acquiring another corporation. You have two choices—the cost of each choice is $250,000. You cannot spend more than that, so acquiring both corporations is not an option. The following are your critical data:
Corporation A
Revenues = $100,000 in year one, increasing by 10% each year
Expenses = $20,000 in year one, increasing by 15% each year
Depreciation expense = $5,000 each year
Tax rate = 25%
Discount rate = 10%
Corporation B
Revenues = $150,000 in year one, increasing by 8% each year
Expenses = $60,000 in year one, increasing by 10% each year
Depreciation expense = $10,000 each year
Tax rate = 25%
Discount rate = 11%
Compute and analyze items (a) through (d) using a Microsoft® Excel® spreadsheet. Make sure all calculations can be seen in the background of the applicable spreadsheet cells. In other words, leave an audit trail so others can see how you arrived at your calculations and analysis. Items (a) through (d) should be submitted in Microsoft® Excel®; indicate your recommendation (e) in the Microsoft® Excel® spreadsheet; the paper stated in item (f) should be submitted consistent with APA guidelines.
A 5-year projected income statement
A 5-year projected cash flow
Net present value (NPV)
Internal rate of...

...CapitalBudgetingCase
With an initial investment of $250,000, we could purchase one of two corporations. By analyzing each corporation we can make an educated decision on which corporation holds the highest return. A five year projected income statement, five year projected cash flow, and the NVP and IRR of both corporations have been created to aid in analysis. After reviewing the information, Corporation A is projected to have a higher return value than Corporation B.
Corporation A, would cost us $250,000. In the first year the revenue would be $100,000 and increase 10 % each year. First year expenses would be $20,000; increasing 15 % per year. Depreciation expense each year would be $5,000. The tax rate is 25 % with a discount rate of 10 %. Corporation B, would also cost us $250,000. The revenue in the first year would be $150,000 increasing 8 % each year. Expenses would be $60,000 year one; increasing 10 % each year. The depreciation expense each year would remain at $10,000. The tax rate is 25 % with a discount rate of 11 %.
The information from each corporation was applied to create a five year projected income statement. It would take Corporation B 4 years to produce the net income Corporation A would produce in its first year. Based on the projected income statement alone, Corporation A would give higher return than Corporation B. See attached excel spreadsheet to view the projected income statements for both...

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