Unit 9 Assignment 2 Capital Budgeting
Week 9 Assignment 2 Submission
Assignment 2: Capital Budgeting
Futronics, Inc. $2 billion company, reducing costs and corporate overhead to use outside vendor resources. Initial investment costs $1 billion. There is 0 salvage value and cost of capital at 8%.
Yield cash flows
$450,000 year 1
$350,000 year 2
$300,000 year 3
$250,000 year 4
Internal rate of return
Average net return = (450,000 + 350,000 + 300,000 + 250,000)/4=
1,350,000/4 = 337,500
Average investment = (Investment at beginning and investment at the end[salvage value])/2 =
1,000,000/2 = 500,000
ARR = Average net income/average investment = 337,500/500,000= 0.675 = 67.5%
Simple payback of the $1 billion investment, which is the total amount to recover.
1,000,000
$450,000 year 1
$350,000 year 2
$300,000 year 3 (450,000 + 350,000 + 300,000 =1,100,000). So in the third year, the investment of one billion is totally paid off.
$250,000 year 4 (This year is not needed).
Simple payback of the $1 billion investment (which is the total to recover).
Net present value
$1,000,000/450,000 = 2.22 year 1
$1,000,000/350,000 = 2.85 year 2
$1,000,000/300,000 = 3.33 year 3
$1,000,000/250,000 = 4 year 4 …show more content…
If the company miscalculates, it could lose a lot of money and also go bankrupt. If it risks the money and it pays off, the company could become very profitable and it would be worth the risk. The least valuable capital budgeting method is the method rate of return, because if the other projects are paying back less than 67.5%, they are not worth pursuing. This may be difficult to determine based on the value of an ongoing project at the company, and how accurately the owners can value or quantify risks in the capital budgeting project (Wood, 2010, p.
Assignment 2: Capital Budgeting
Futronics, Inc. $2 billion company, reducing costs and corporate overhead to use outside vendor resources. Initial investment costs $1 billion. There is 0 salvage value and cost of capital at 8%.
Yield cash flows
$450,000 year 1
$350,000 year 2
$300,000 year 3
$250,000 year 4
Internal rate of return
Average net return = (450,000 + 350,000 + 300,000 + 250,000)/4=
1,350,000/4 = 337,500
Average investment = (Investment at beginning and investment at the end[salvage value])/2 =
1,000,000/2 = 500,000
ARR = Average net income/average investment = 337,500/500,000= 0.675 = 67.5%
Simple payback of the $1 billion investment, which is the total amount to recover.
1,000,000
$450,000 year 1
$350,000 year 2
$300,000 year 3 (450,000 + 350,000 + 300,000 =1,100,000). So in the third year, the investment of one billion is totally paid off.
$250,000 year 4 (This year is not needed).
Simple payback of the $1 billion investment (which is the total to recover).
Net present value
$1,000,000/450,000 = 2.22 year 1
$1,000,000/350,000 = 2.85 year 2
$1,000,000/300,000 = 3.33 year 3
$1,000,000/250,000 = 4 year 4 …show more content…
If the company miscalculates, it could lose a lot of money and also go bankrupt. If it risks the money and it pays off, the company could become very profitable and it would be worth the risk. The least valuable capital budgeting method is the method rate of return, because if the other projects are paying back less than 67.5%, they are not worth pursuing. This may be difficult to determine based on the value of an ongoing project at the company, and how accurately the owners can value or quantify risks in the capital budgeting project (Wood, 2010, p.