StudentShare solutions
Triangle menu

Capital Budgeting - Research Paper Example

Nobody downloaded yet

Extract of sample
Capital Budgeting

c. Mutual exclusivity requires a business organization to choose only one project. Consistent with the goal of every company to maximize its wealth, the project with the higher NPV is chosen regardless of the investment cost. Thus, project B is chosen over project A even though its IRR and MIRR is lower.
Since the lowest even life cycle of the projects under consideration is 12, the Equivalent Annual Annuity is utilized in order to make the best decision. Thus, the present values of cash flows within the first three years of each project are computed. Afterwards, these are divided by the PVIFA of the projects. For project A, this means dividing it with the PVIFA within 3 years at 8% while for project B a life of 4 years and 8% discount rate is utilized. At the end, the four year alternative is chosen because it has a higher NPV of ($63,100.92).
a. Any investment should still be evaluated regardless of the fact that the investment is higher than the cash inflow. It should be noted that the profitability of an investment is not solely based on whether the investment exceeds the cash inflow because of the time value of money. Evaluation of the project using different required rates of return also reveals that NPVs can be positive or negative depending on the discount rate.
b. b. For this project, there are two computed IRRs which is due to the fact that there is a change in the sign of cash flow for the project's life span. For the first year, there is an outflow (negative cash flow) while in the second year cash flow is positive. During the end of its life, the project again has a negative cash flow. Since, the sign changes twice, two IRRs are expected. As computed by Excel, these IRRs are 10.09% and 20.81% indicating that NPVs are zero in these discount rates.
On the other hand, MIRR is approximately equal to the discount rate where it is computed. This is due to assumption of MIRR that cash flows are reinvested at the discount rate.
c. Figure 1 in the Appendix shows the computed NPVs at discount rates of 5% (NPV=-$730.16) , 15% (NPV=$215.50), 18% (NPV=$159.44) and 25% (NPV=-$400.00). Thus, the project should be accepted at 15% and 18% discount rates. Noting the IRRs above, projects should be accepted at discount rates within 10.09% and 20.81%.
Number 5.
a. For the proposed replacement, NPV is computed to be $43,103.55 while IRR and MIRR are 19.60% and 16.98%, respectively.
b. The positive NPV as well as the IRR and MIRR which are higher than the discount rate indicate that Maltpon Company should replace its old machine.

Number 6.
a. The introduction of the new product will yield a positive NPV of $286,590. Consistent with this, IRR is computed to be 20.94% which is higher than the discount rate of 15%. MIRR is 19.30%. Thus, the project should be accepted.


Appendix 1.
a) Net Present Value: NPV = PV(Cash flows) - Initial Investment (C0)

PV =
PV= -10000/(1+14%)1 + 20000/(1+14%)2 + 20000/(1+14%)3 + 20000/(1+14%)4 + 20000/(1+14%)5
PV= -8771.93+15389.35 + 13499.43 + 11841.61+ 10387.37
= ...Show more


c. The project should be accepted because it satisfies all the criteria as shown by the results of the computation. Based on above, the NPV is positive which also implies a positive profitability index. Also, since the project is expected to generate higher values that cost of capital both IRR and MIRR are higher than the required rate of return of 14%.
Author : howeyvonne
Capital Budgeting Research Paper essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the research paper on your topic
"Capital Budgeting Research Paper"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

Capital Budgeting
Tatum (2011) states, “Capital budgeting is a fiscally responsible process that is designed to manage available resources to select the long term projects”. The selected projects have the tendency to yield a high return on investment of capital or resources.
5 pages (1250 words) Research Paper
Pros and Cons of Capital Budgeting Measures
Capital budgeting techniques are applied in the determination of these projects. There are two major types of capital budgeting techniques. The first types are the non-discounted methods where there is no determination of the present values of the future expected cash flows.
7 pages (1750 words) Research Paper
Financial Management in Nonprofit Organizations
Today companies pay specific attention to setting financial management strategies. Several strategies have been developed to maintain a tie between enterprises’ cash inflow and outflow. Evidently, there are certain legal restrictions that limit the scope of financial management operations in nonprofit enterprises.
8 pages (2000 words) Research Paper
Capital Budgeting Analysis
The company, in 2003, has shown a strong growth in the quality of the net income over the three years showing a 31 percent as compared to 2001. Likewise, the return on total assets has improved over the three years. The company provides 15.9 cents for every $1 invested in the assets of the company as compared to 13.7 cents in 2001.
4 pages (1000 words) Research Paper
Capital Budgetting Research Paper
In addition, finance is important in the construction of financial statements, diversification in the value of money in an economy and management of capital. However, financial landscape keeps changing around the economy framework due to increase in innovation, growth of wealth accumulation, computing and networks advancement and the periodic onset of financial crises in the world.
7 pages (1750 words) Research Paper
Capital Budgeting
Long-term assets are generally tangible items such as plant or equipment or property or intangible items such as trademarks or patents, technology and others. The decisions of capital budgeting are vital for
7 pages (1750 words) Research Paper
Write a paper that analyzes the pros and cons of commonly used capital budgeting measures
The first types are the non-discounted methods where there is no determination of the present values of the future expected cash flows. Examples here include the payback period and the accounting rate of return. The other techniques employed in the
7 pages (1750 words) Research Paper
Capital Budgeting Projects
However, the governments in appraising their projects face the problems of measuring the cost and benefits and in r determining the costs. San Diego capital improvement
1 pages (250 words) Research Paper
Capital Budgeting Techniques
Managers must consider that these projects affect the company in the long term. Four capital budgeting techniques are net present value (NPV), internal rate of return (IRR), payback period, and profitability index
2 pages (500 words) Research Paper
ikewise, in this paper we are going to discuss on how the government capitalizes on its resources to meet its expenses to cater for the public via budgeting. A budget is a quantitative plan of future intention. Therefore, capital budgeting is the process of using resources at
4 pages (1000 words) Research Paper
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
Comments (0)
Click to create a comment
Contact Us