Analysis of Capital Budgeting: Financial Appraisal of Investment Projects Article by Dayananda - Essay Example

The computation of every exhibit is mainly based on certain assumptions such as factoring in the expected value at the expense of the probable value. Probable value offers a relatively suitable and precise benchmark for predicting the future sales of the company (Dayananda, pp.124-178). Based on the expected value, manufacturing of pipes is more favorable despite not taking into account positive side influences producing additional tubes, which are reaped from the presently manufactured pipes.

The decision to manufacture pipes is mainly based on the NPV of the projects under specific conditions. In the scenarios, the NPV of undertaking the project reduces equating it to the corresponding NPV of purchasing the pipes. Moreover, this results in the decrease of incremental cash flow for the project to zero thus making the strategy unfeasible (Dayananda, pp.124-178). Lowering the price by the supplier changes the NPV to change by $ 100,000.