Capital Budgeting and Investment Appraisal: The Alpha plc - Assignment Example

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This paper “Capital Budgeting and Investment Appraisal: The Alpha plc.” seeks to help Alpha to decide whether it should acquire an open-cast coal mine in South Wales at £2.75 million. The paper will make recommendations to the company as to whether the project should go ahead…
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Download file to see previous pages The company should proceed with the acquisition because of the positive NPV of the proposal as generated using the cost of capital of 12% as the discount rate. Calculations are summarized in Appendix A and some of the highlights that must be pointed here are the fact the depreciation must be added back to the net profit or loss in the computation of the net cash flows per year. The depreciation as presented in the case was apparently understated, as the breakdown does not add up to £13.75 million. This was corrected by doubling the amount of depreciation in Year 4 since the project will only last for four years. The depreciation amount then per year was added back for each applicable year since depreciation does represent cash inflow. Since there is also clearing cost to be used in at Year 5, the discounting included Year 5 in the Schedule. The salvage value £ 2.75 million is also included as part of cash inflow at end of Year 4. See Appendix A.
 The assumptions made for the use of NPV include those the time value of money and the reliability of the discount rate used in discounting the estimated cash flows. The use of cost of capital in net present value analysis assumes cash flow values to be discounted using the weighted average of cost of capital (WACC) as the discount rate. The cash flow could either be cash inflows or cash outflows arising from the expected benefits of a certain proposal and costs and other cash outlays that are needed to have the either of the proposals. The concepts of cash flows and discounting the same are very much related to the concept of time value of money, which assumes that a £100 today has more value or is preferable than £100 in the future. ...Download file to see next pagesRead More
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