Introduction of Capital Budgeting Capital budgeting is the process of identifying‚ analyzing and selecting investment project by a firm which the project expected will generate cash flows over one year. Each potential investment’s value will be estimated by using a Discounted Cash Flow (DCF) valuation in order to find its Net Present Value (NPV). All the incremental cash flows from the investment required estimating the size and timing by using this valuation. The NPV will influence by the discount
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CAPITAL BUDGETING PROBLEM BMW Bike is considering building a new plant. Juan Optimist‚ the company’s marketing manager‚ is an enthusiastic supporter of the new plant. Mila Pessimist‚ the company’s chief financial officer‚ is not so sure that the plant is a good idea. Currently the company purchases its skateboards from foreign manufacturers. The following figures were estimated regarding the construction of a new plant. Cost of plant 4‚000‚000 Annual cash inflows 4‚000‚000 Annual cash
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for a given period of time. Sn = P (1+r)n where: Sn = Future value P = present value or principal r = interest rate n = number of years or time period. Example Suppose you have Sh.1000 and you are promised 10% for the next four years‚ how much will you have at the end of the four years. Solution; Sn = P (1+r)n = 1000 (1+0.1)4 = 1000 x 1‚4641 = 1464.10 or tables FV = P x Future Value Interest Factor (FVIF) = 1000 x 1.4641 = 1464.10 ii/ Present
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This is an application of capital budgeting that integrates the projection of a basic cash flow and the computation and analysis of six capital budgeting tools. 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: a. Corporation A: 1) Revenues = 100K in year one‚ increasing by 10%
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Project-1: Capital Budgeting Simulation MBA AF 620 Objective: The purpose of the Capital Budgeting Simulation project is to explore the problem of resource allocation within a corporation by looking at many projects from the senior-management perspective. This simulation is a useful complement to capital-budgeting cases that focus on single projects. Illustrate the impact of capital rationing on capital investment choices. Exercise and interpret the implication of tools of investment analysis
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CHAPTER 4 PART II: VALUATION AND CAPITAL BUDGETING Discounted Cash Flow Valuation The signing of big-name athletes is often accompanied by great fanfare‚ but the numbers are often misleading. For example‚ in late 2010‚ catcher Victor Martinez reached a deal with the Detroit Tigers‚ signing a contract with a reported value of $50 million. Not bad‚ especially for someone who makes a living using the “tools of ignorance” (jock jargon for a catcher’s equipment). Another example is the contract signed
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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
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Review of Capital Budgeting 1. The Kramer Tool Company has a photocopying machine that it purchased two years ago for $70‚000. The machine is being depreciated straight line over 5 years to a zero salvage value. A competing firm is offering a new photocopying machine that cost $60‚000 and can be depreciated over 5 years to a zero salvage value. Kramer has been assured that the new machine can be sold for $10‚000 after five years. The new machine requires less maintenance and operator attendance
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University of Phoenix Material Capital Budgeting Case 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
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business owner faces make many important decisions from the very start of establishing a business. They must determine what kind of business they want to be‚ whether to be a solo proprietorship‚ limited liability corporation (LLC) or a corporation. Once this decision has been made there are many different aspects that must be taken into consideration for the company to become successful and stay successful. One very important aspect is cash flow and how funds must be utilized within the company
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