Got a tricky question? Receive an answer from students like you! Try us!

Capital Budgeting: Case Study (Answering questions) - Math Problem Example

Only on StudentShare
High school
Math Problem
Finance & Accounting
Pages 7 (1757 words)

Summary

1. From the given data, it can be seen that Project ‘p’ has a higher NPV as compared to Project ‘q’. Hence, if NPV is chosen as the criterion, Project ‘p’ must be preferred. However, it is also seen that Project ‘q’ has a higher IRR.

Extract of sample
Capital Budgeting: Case Study (Answering questions)

Overall, there is a large difference between NPVs of the two projects while there is a smaller difference between their IRRs. Hence, Project ‘p’ should be selected over Project ‘q’.
Moreover, IRR ranking is misleading here because the base investment (initial cash outflow) in the two projects is not the same. The cash outflow in Project ‘p’ ($200) is twice that of project ‘q’ ($100). Hence, it would not be appropriate to compare the two projects on IRR basis.

2. Let ‘S’ be the periodic saving, ‘i’ be the interest rate, ‘P’ be the annual payments to be ensured, ‘n’ be the number of years for which savings are done and ‘N’ be the number of years for which payments are to be ensured. According to the given data,
S has to be calculated
i=4%
P=$30,000
n=20 years
N=15 years
Now, Future value of all savings at the end of 65 years= Present Value of all payments at the end of 65 years
i.e. S[(1+i)^n-1]/i = P (1-(1/(1+i)^N))/i
i.e. S[(1+.04)^20-1]/.04 = 30000 (1-(1/(1+.04)^15))/.04
i.e. S= $11,201.25
Hence, the annual savings must be $11,201.

3. Table 3.1 depicts the Interest paid, Principal Paid and Principal Balance at the end of first 10 years. Here, Interest paid is calculated as 10% of principal balance in the previous year. The Principal paid is calculated as the difference of Yearly Installment and Interest

Table 3.1: Yearly Installment Plan at 10% rate of interest throughout
Year Interest paid Principal paid Principal balance
0 0 0 200000
...
Download paper
Not exactly what you need?

Related Essays

Assignment on stock return, portfolio and risk management
The dividends an investor might receive could be either a cash dividend or a stock dividend. To calculate the stock realized return you have to add the capital gain obtained at the moment of sale and the total dividends received while the investor held the common stock. The addition of these two variables would then be divided by the original price the investor paid for the stock or lot of stocks. This calculation would give the gross return. The net return is calculated by subtracting the tax expenses associated with the investment from the numerator of the formula. It is important for…
4 pages (1004 words)
Capital Budgeting
Next section highlights the motivation of top management of William Hill Plc behind this acquisition deal. Subsequent section emphasizes the impact of this acquisition on the capital structure of William Hill Plc. Last section of this article describes the impact of this acquisition on the value of William Hill Plc followed by a conclusion section which leads to the end of this article. Growth Forms – Organic v/s Acquisition There are different forms of growth approaches that companies generally follow. Typically if a company wants to make growth, then in such circumstances the company has…
10 pages (2510 words)
Capital Budgeting
There are various capital budgeting techniques which are used in evaluation of a project so to determine its viability they include; net present value, internal rate of return, profitability index, average rate of return, pay-back period and modified internal rate of return. Guillermo Furniture is faced with three investment situations, which are to continue with the current production, adopt high-tech production, or act as a broker. Therefore, there is need to ascertain which of the investment will yield the highest returns to the firm. In order to carry out efficient investment appraisal, we…
2 pages (502 words)
Capital Budgeting Analysis
This shows that the company has improved on the efficiency of the usage of the assets of the company. This is also depicted by an improving asset turnover over the three year period. In 2003, the company generated $1.25 of revenue for every $1 invested in the assets of the company. Moreover, the company is also maintaining a strong control on its administrative and selling expenses; this is depicted by an improving net profit margin. This signifies that the company has strong growth prospects in future and could pave it way to become the market leader in its line of products. Figure 1 Figure 2…
4 pages (1004 words)
Hewlett Foundation Case Study
The asset allocation policies are formulated by the foundation, internally managed but uses external manager to invest the portfolio. The external managers can either invest 100% of the asset in indexed instruments or invest partially depending on the allocation method. There are four methods that the foundation uses in evaluating the performance of its portfolio. To begin with, it uses a benchmark with which it compares the performance of each asset. If the portfolio outperforms its benchmark, then it is a worth portfolio to invest in. on the other hand, if its performance is less than that…
4 pages (1004 words)
Case Study Report related to "Public Budgeting" .
It serves as a policy guide, management tool, legal document (after the approval of the board) and a financial control instrument towards the organization. So budgeting is basically a mechanism for setting goals and objectives and allocating resources to achieve those objectives. IN other words it can be described as “thoughtful strategic planning process” (Lee, Johnson & Joyce, 2008, pp. 1-8). The report is a snapshot regarding the public budgeting details of a nonprofit organization of United States named as the Human Society of the United States. The report tells about the Budgeting…
6 pages (1506 words)
Corporate Finance: Traditional Capital Budgeting
Management use various Capital budgeting techniques to make effective use of these resource to maximize firm’s value (Bennouna, Geoffrey & Marchant 2010). The key objective of an organization is to determine the investment required for expansion of the project, modernize the existing equipment to reduce the costs or to anticipate demand (Bennouna, Geoffrey & Marchant 2010). In order to make further investment, managers determine the payback period and accounting rate of returns of the long term investments (Harrison & John 2010). Though there are several Capital Budgeting Techniques, However…
6 pages (1506 words)