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

Comments (0) Cite this document
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…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER91.4% of users find it useful

Extract of sample "Capital Budgeting and Investment Appraisal: The Alpha plc"

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
Cite this document
  • APA
  • MLA
(“Capital Budgeting and Investment Appraisal: The Alpha plc Assignment”, n.d.)
Retrieved from
(Capital Budgeting and Investment Appraisal: The Alpha Plc Assignment)
“Capital Budgeting and Investment Appraisal: The Alpha Plc Assignment”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF Capital Budgeting and Investment Appraisal: The Alpha plc

Capital Budgeting of Pevensey PLC

.... PRESENT SCENARIO: Pevensey PLC is a growing company. It needs to decide on the best option of a machine purchase. Currently, the company has four different options to ponder upon. It is good for the company to use financial tools of capital budgeting to appraise each of the four options before making the purchase. This will reduce the chances of a bad decision, and will put the company in a win-win direction. Hence, the company has done the right thing by consulting someone with the financial knowledge to look at the available options and deciding the best option for the purchase (Brigham & Ehrhardt 2010). This would ensure that the best purchase is made in the given...
7 Pages(1750 words)Essay

Capital Budgeting

...? McKenzie Corporation’s Capital Budgeting Restrictions to external sources of funding usually make a company to result to internal sources of funding. Financing projects from equity carries inherent and far-reaching implications for the company, requiring careful and critical evaluation to ensure the move does not cripple the overall operations of the company and compromise its profitability. In addition, the company in question has to contend with unpredictable economic climate, which may threaten the success of new investment plans. Solutions to these questions are tenable through capital budgeting techniques. This paper analyzes McKenzie Corporation,...
3 Pages(750 words)Case Study

Capital Budgeting

...? Report: Memo Format Chair of the Boards of Directors of MGM Resorts International Please write February 28, Capital Budgeting ****************************************************************************** Introduction Before going into the details related to different aspects of capital budgeting, let us get a better understanding of what capital budgeting actually is. 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...
5 Pages(1250 words)Research Paper

Investment Appraisal: The Zeta plc. Case observed that IRR is found to be around 28.45% which is quite higher. Since the cost of capital used in the project is 15%, therefore the excess return that investors can anticipate from the project is around 13.45% which is near to double. In this way, the project seems to be highly beneficial for The Zeta plc. If the existing net cash flows of the given project are discounted at 28.45%, the NPV of the project becomes zero. Profitability Index This measure of investment appraisal is itself not an altogether a new technique rather it provides the results of NPV is a different form. As NPV provides the results in absolute money terms, this technique converts the...
6 Pages(1500 words)Essay

Capital Investment Appraisal

... Capital Investment Appraisal This paper analyzes the role of real options in making strategic investment decisions. Effective capital budgeting is important to corporate survival. During the capital budgeting process, managers make decisions that commit the firm's resources, primarily capital and labour, across business lines and over time. The traditional capital budgeting decision model used is discounted cash flow (DCF). Such an analysis is linear and static in nature and assumes the investment opportunity is not totally reversible or is a now-or-never opportunity. It also implicitly assumes net present value (NPV) positive projects exist only when firms can exploit temporary competitive advantages and governments do not exist... or are...
3 Pages(750 words)Essay

Capital Budgeting - Capital investment appraisal

...Capital Investment Appraisal a) Machine A Present Value Purchase Price (1570000) Working Capital (47000) Running cost (151671) Overhaul Cost (73494) Disposal Cost (51072) Labor Cost Saved 2823414 WC Released 21432 Net Present Value £ 951609 b) Report to the Managing Director:- After carefully combining all the information provided by salesmen and management accountant, I have performed an NPV analysis of the both proposed project’s cash flows. Results have shown that NPV of Machine B is 80% greater than NPV of machine A. So, Temple Ltd. should install Machine B for more effective automation process and to reduce its production costs and operate much more cheaply...
1 Pages(250 words)Speech or Presentation

Capital Budgeting and Investment Appraisal: The Alpha plc. Case

...Capital Budgeting and Investment Appraisal: The Alpha plc. Case Part a) Sources of Initial Cash Outflow: Purchasing open cast-coal mine in South Wales at a cost of £2.75 million The company will require vehicles and equipment costing £13.75 million Working Capital of £0.55 Million is required. Cash Outflow   Cost of Equipment -13.75 Changes in Working Capital -0.55 Cost of Coal Mine -2.75 Total Cash Outflow -17.05 Cash flows for each period: We have used these data for preparing the cash flow forecasts for the economic life of the project. The project will make an investment in working...
9 Pages(2250 words)Coursework

Capital budgeting

... cost. This will hold assuming that there will be no changes in the discount rate, capital will be abundant and that the projected cash flows will be realized. References Brigham E and Houston J .2009. Fundamentals of Financial Management. Belmont, CA, United States: Cengage Learning. Baker, H. and Kent, Powell, G.2005 Understanding financial management: a practical guide. New York: John Wiley & Sons. Peterson, P, Fabozzi, F.2002. Capital budgeting: theory and practice New York: John Wiley & Sons. Dayananda, D. 2002. Capital budgeting: financial appraisal of investment projects. London: Cambridge University. Pogue, M.2010.Investment Appraisal. New York: Business Expert.... There are several techniques which are applied by the financial...
3 Pages(750 words)Essay

Capital Budgeting

...Module 05 - Case Assignment The management at William’s Pharmaceutical is considering new computers and equipment to manage inventory and to expedite online orders and product shipment. The investment will be $100 thousand and the cost of capital is 15%. The company earned $500 thousand in sales last year and anticipates the new equipment could increase sales by 10% annually. Based on what you have learned about capital budgeting, would this be a profitable investment over the next five years? Years Total Sales Cash Flows Disc. Fact. (15%) Disc. CFs Cum. CFs 0 500,000 (100,000) 1 (100,000) (100,000) 1 ...
2 Pages(500 words)Assignment

Capital Budgeting

...Capital Budgeting Capital Budgeting Capital Budgeting Exercise Machine A Year 0 2 Investment (1000) Maintenance Cost (300) (300)Cash Flows (1000) (300) (300) Discount Factor (8%) 1 0.9259 0.8573 Discounted Cash Flows (1000) (278) (257) Net Present Value = 1535 Equivalent Annual Cost (EAC) = Net Present Value/ Annuity factor (t,r) EAC = 1535/ 1.7833 EAC = $ 860.7 Machine B Year 0 1 2 3 Investment (1300) Maintenance Cost (200) (200) (200) Discount Factor (8%) 1 0.9259 0.8573 0.7938 Discounted Cash Flows (1300) 185 171 159 Net Present Value = 1815 EAC = 1815/ 2.5771 EAC = $ 704.28 Equivalent Annual Cost is...
2 Pages(500 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Assignment on topic Capital Budgeting and Investment Appraisal: The Alpha plc for FREE!

Contact Us