and research development projects are worth pursuing. It is budget for major capital‚ or investment‚ expenditures. Many formal methods are used in capital budgeting‚ including the techniques such as 1. Accounting rate of return 2. Net present value 3. Profitability index 4. Internal rate of return 5. Modified internal rate of return 6. Equivalent annuity These methods use the incremental cash flows from each potential investment‚ or project. Techniques based on accounting
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projected income statement and cash flow statement as well as each Corporation’s NPV and IRR. The net present value represents the project adds to shareholder wealth. The net present value is also the present value of future cash returns. In order to find the net present value‚ the present value of cash flows and sum of discounted cash flows has to be determined. Finding the present value of cash flows includes the revenue minus the expenses‚ depreciation‚ and tax. The same applies for
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ASSIGNMENT IS 20 POINTS. PLEASE SHOW ALL OF YOUR WORK. NAME: Telecom Italia is considering the investment in a capital project. The initial cost in year 0 is $149‚000 to be depreciated straight line over 5 years to an expected salvage value of $15‚000. The firm’s tax rate is 35% and it has an 11% cost of capital (the firm’s discount rate‚ or "hurdle" rate). For this project an additional investment in working capital of $12‚000 is required and it will be recovered in full at the end of
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undertaken since it has a positive net present value hence maximises shareholders objective of wealth maximisation. Option two should be rejected because it has a negative net present values i.e. the cash out flows are greater than the cash inflows. In the above evaluation the uncertainty that exists is the determination of future expected cash inflows. In the calculation of increases in sales consideration has been made to cater for the increase in negative net present value i.e the cash outflow are greater
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organization. An overview of each possible technique provide it this paper before explaining how the how the recommendation was made. After considering Guillermo ’s circumstance‚ evaluating Guillermo Furniture ’s data sheet and using the present value index method to compare his alternative capital investment opportunities‚ a recommendation was ready to be made to Guillermo. It is recommended that Guillermo select the high technology investment solution because of its higher return rate.
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investment. PROJECT A Initial Investment: The amount of money a business invests in a capital investment project. It can be sourced from various means such as banks or shareholders funds. It is given as ₤115‚000 NO OF YEARS(YR) | NET CASH FLOW (NCF) | CUMMULATIVE NET CASH FLOW(CNCF) | 1 | 38‚000 | 38‚000 | 2 | 42‚000 | 80‚000 | 3 | 48‚000 | 128‚000 | 4 | 50‚000 | 178‚000 | 5 | 70‚000 | 248‚000 | Payback period = 2 + 115‚000 − 80‚000 48‚000
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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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are: * Profitability index * Net present value * Modified Internal Rate of Return * Equivalent annuity * Internal rate of return Profitability Index The profitability index is a technique of capital budgeting. This holds the relationship between the investment and a proposed project’s payoff. Mathematically the profitability index is given by the following formula: Profitability Index = (Present Value of future cash flows) / (Present Value of Initial investment The profitability
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by different methods; one of them is by investing in projects that will maximize the value of the firm. However‚ many analyses should be made before making the decision to invest in determinant projects. The process by which the firm decides which investment is most profitable is called capital budgeting. There are different methods by which a firm can find the economic valuation for a project: net present value (NPV)‚ internal rate of return (IRR) and profitability index (PI). Even though the
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1. When a firm maximizes profits it will simultaneously minimize opportunity costs. Answer: True Terms to Learn: opportunity cost 2. The usual starting point in budgeting is to forecast net income. Answer: False Terms to Learn: operating budget The usual starting point in budgeting is to forecast sales demand and revenues. 3. If the $17‚000 spent to purchase inventory could be invested and earn interest of $1‚000‚ then the opportunity cost of holding inventory
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