StudentShare solutions

# Net Present Value and Internal Rate of Return - Assignment Example

## Extract of sampleNet Present Value and Internal Rate of Return

Table 1 shows the cash inflow expected to be generated and the cash outflow expected to be incurred should the proposed expansion be undertaken. During the first year, the company will incur expenses to finance the purchase of the new plant and equipment costing 5,000,000. It is assumed that this amount will be a one time expense fully incurred during the first year.
This report also recognized the need to recognize the investment in research and development already incurred by the company. The rationale behind this is to fully and adequately evaluate the profitability of the project. It should be noted that in order to come up with a proper valuation, the company should account for all the revenues and expenses generated by the project. Thus, it is inclusive of all the expenses incurred to bring the project in operation. Research and development cost of 900,000 should be accounted for because without it, the expansion will be impossible to pursue.
During 2005, the amount of 1,800,000 to cover additional working capital expenses is also included in the cash outlay required. However, management also expects that after five years, this amount will be freed up and can be readily used by other projects. Thus, Table 1 also shows that during 2005, the company will be needing 1,800,000 while this amount will be available during 2010.
In the case of the overhead costs, this report decided to use the 300,000 per annum as estimated by the project development team advisor. This is deemed appropriate as allocating 50% of the wages is just an estimate. It should also be noted that depreciation expense will not be included in the computation of the NPV because cash flow is not directly affected by the account. As taxes and inflation are excluded in the analysis, tax shield from depreciation will not be considered.
The computation for NPV is shown in Table 2. Since the company is using 14% as the required rate of return for the expansion, the cash flows are discounted at the same rate. According to the computation in Table 2, the NPV of the expansion using 14% cost of capital is (403.47).
Table 2. Discounted Cash Flow and NPV for Expansion
(2005-2010, in thousand)

2005
2006
2007
2008
2009
2010
Total Inflow/ (Outflow)
(8500)
2,040
1,940
2,140
2,140
3,940
Present Value Factor (14%)
1.0000
0.8722
0.7695
0.6750
0.5921
0.5194
Present Value
(8500)
1789.4
1492.8
1444.5
1267.0
2046.4
NET PRESE NT VALUE (403.47)

Internal Rate of Return
The internal rate of return is the cost of capital which equates the net present value of all cash flow to zero. The IRR can be computed by calculating the NPV at different interest rates. Utilizing this method, we come up with Figure 1 which shows that IRR is approximately 12%.

Figure 1 . NPV at Different Cost of Capital

Question 2. Prepare an informal report for the Board of ...Show more

## Summary

In evaluating the viability of the expansion of Bradford Renovation and Rebuild Ltd, the Net Present Value (NPV) method will be utilized. Economists argued that NPV is a better alternative in capital budgeting decisions because it takes into account the time value of money.
Author : aleen19
Save Your Time for More Important Things
Let us write or edit the assignment on your topic
"Net Present Value and Internal Rate of Return"
with a personal 20% discount.
Grab the best paper

### Related Essays

New World Resource Assignment
\$800000) = 2 + (792000 ? \$800000) ? 2 + 0.82 ? 2.8 years Return on investment Return on investment = totol amount gained/totol amount invested. = 2798000/1000000 = 2.7980 Net present value Year             Cash Flow                 Present Value  0                 -1,000,000                 -\$1,000,000  1                  8,000                   \$181,818.18  2                  200,000                   \$247,933.88   3                  800,000                   \$150,262.96 4 820,000 5 970,000 Net Present Value = \$80,015.02 Th
11 pages (2750 words) Assignment
Primary Drawbacks of Net Present Value as Capital Budgeting Technique
The application of this tool is dependent upon the future cash flows that the investment opportunity or project will generate. This technique takes future cash flows generated by an investment opportunity and discount them to reach the present value of those cash flows.
6 pages (1500 words) Assignment
Critically appraise the application of traditional capital budgeting techniques
Conclusions 4. Recommendations Abstract With the turn of the 21st century, the global business environment has undergone tremendous changes, which brought about many positive and negative consequences. Globalization and related pressures significantly boosted global market competition, and that in turn led to technological advancements and business innovations.
18 pages (4500 words) Assignment
Market rate of return
Firstly, the security market line (SML) is the capital asset pricing model (CAPM) representation. It is a basic relationship estimate between return and risk in a stock price. Estimation of the SML and comparing it to the actual historical stock returns enables the investor to get a sense of whether the stock is overvalued or undervalued, based on the assumptions of the investor about future performance (Sharpe,3).
3 pages (750 words) Assignment
Capital Investment
The Company is exploring the possibilities of expanding its operations in to the African country of Medco Republic. This country has until quite recently been inflicted by conflicts and regarded politically unstable. This report becomes necessary in view of the earlier political instability prevailed in the country.
7 pages (1750 words) Assignment
Eco3a
This technique takes future cash flows generated by an investment opportunity and discount them to reach the present value of those cash flows. This entire process has multiple loopholes, for instance the uncertainty
6 pages (1500 words) Assignment
The Net Present Value (NPV)
This means that it is prudent for an investor to consider the present value of the expected net returns and compare this with the present value of the initial expenditure that the investor incurs on the
6 pages (1500 words) Assignment
Critically appraise the application of traditional capital budgeting techniques
In this context, the concept of capital budgeting is of considerable significant because it evaluates future cash inflows and outflows on a prospective business project and thereby determines it potentiality. A variety of methods are used in capital budgeting including payback
18 pages (4500 words) Assignment
Present Value
Looking at the three projects, the Real Estate Brokerage is the project with the highest risk. For one reason, it is requires a high capital to start, and as it is known to us, the
3 pages (750 words) Assignment
Calculating cash flow and net present value (see paper for details)
Such costs as presented in the case of this manufacturing organization is the acquisition of the new machinery at a cost of £300K, removal of the old machinery at a cost of £30K and the installation cost of £60K. On
1 pages (250 words) Assignment
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger