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Analysis of the project if continued with only new product with optimistic sales figures - Essay Example


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Analysis of the project if continued with only new product with optimistic sales figures

A lot of capital budgeting techniques are used to analyze the capital investments among them the most popular ones are net present value and internal rate of return. The net present value can be described as the excess of present value of cash inflow over the present value of cash out flow (Bringham and Ehrhardt, 2010, p.383). In this project the investment decision has been taken by both net present value method and the internal rate of return method. The incremental cash flows have been prepared with the help of the projected sales and costs figures. While computing the incremental cash flows the expenses regarding the research and other expenses done before the implementation of the project as these expenses are sunk costs and does not depend upon the implementation of the project. The main calculations have been done on the base or most likely projections. The tax shield which is required to calculate the cash flows have been computed as per the tax provisions as the main objective of the analysis is to determine the exact cash flow position due to the implementation of the project. ...
At the end of the project the organization will receive the balance of the working capital on that day. No matter with which ever method the investment decisions are evaluated the importance of the cash flows remains same for each and every method of capital budgeting. While commuting the cash flow it is very important to consider the product cannibalization costs that are the revenue forgone for initiating

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the new project (Shapiro, 2008, p.63). These are deducted from the revenues from the new project. This is done to ensure that the sales from the new products should cover up the loss from the foregone sales of the existing product. Project acceptance or rejection The decision criteria of net present value method is that the projects with positive Net present value that is if the discounted cash inflow is greater than the discounted cash out flow then the project should be accepted. While analyzing the most likely data of the projected sales and costs it has been found that the present value of cash inflow is more than the cash out flow hence the project should be accepted. Again on computing the internal rate of return it has been found that the IRR is more than the cost of capital, the cost of capital is 15% where as the internal rate of return of the project is almost 20% therefore the project should be accepted. Through this analysis it can be said that if the project is initiated then the company will be able to recover all its costs incurred and also the rate of return will also be much less than the internal rate of return. Table 1: NPV and IRR as per base scenario Analysis of the project if continued with only new product with optimistic sales figures As there has been a debate on the sales figure that is the projected sales figures and the exclusion of the


Case Study Contents Case Study 1 Contents 2 Executive summary 3 Project acceptance or rejection 4 Analysis of the project if continued with only new product with optimistic sales figures 4 Analysis of the project if project with only new product 5 Analysis of the project if project implemented with contract manufacturing and pessimist sales of new product 6 Recommendations 6 Reference 7 Executive summary The capital budgeting decision is a very critical an important decision…
Author : telly31
Analysis of the project if continued with only new product with optimistic sales figures
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