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Finance & Accounting
Pages 8 (2008 words)
To: The Director of Capital Investments From: Assistant Director of Capital Investments Subject: Investment Appraisal Date: December 13, 2012 Report Executive Summary A number of capital budgeting techniques were employed to determine whether the replacement of an old crane by a new ALII crane would be beneficial investment for FCL.
However, the application of the IRR technique revealed that the project has an IRR of 20.2% which is less than the rates FCL uses to discount their investments. In consideration of the rate of inflation and the fact that there seem to be no basis for using a 21 per cent and a 26 per cent rate of inflation as suggested in a meeting, the recommendation was made to invest in the project. The basis for this suggestion was that the investment would facilitate an increase in the company’s efficiency. Furthermore, it would help to improve FCL’s image and so allow the company to obtain more contracts and thus increase its revenues. Introduction Investing in a project is not a simple matter. It involves an assessment of different options. If the project relates to an asset for a new idea, this requires consideration of a number of different options which are completely new to the organization. However, if it involves a new piece of equipment to replace an existing one, it requires consideration of the equipment in use compared to the alternative. FCL is considering whether to replace an old crane which has five (5) years left to be put out of commission with a new ALII Crane. ...
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