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Net Present Value and Capital Expenditures - Essay Example

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The paper "Net Present Value and Capital Expenditures" presents the calculation of the net present value of two chosen projects. Also, the paper looks into the capital expenditures as far as such expenditures have very important features that greatly influence decision making with regard to capital expenditures…
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Net Present Value and Capital Expenditures
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Download file to see previous pages The higher the accounting rate, the better is the project. The rate of return of the French machine is 22.92%, and that of the German machine is 28.95%. Accordingly choice goes in favor of the German machine. This is also because the company has a target of 25% and the German machine surpasses the target. But this decision is based is subject to the following factors:
The discounted cash flow method requires the estimation of costs and revenue over the life of the capital project. This is a difficult exercise. Some time it is very difficult to predict the future of the project. Changes in cost and revenues cannot be predicted. At best prediction can be accurately estimated only for the earlier two-three years of the project.
The method of calculation is internally inconsistent. While the numerator of this method represents profits belonging to equity and pref. stockholders, its denominator represents fixed investment outlay which is rarely equal to contributions of equity and preference stockholders.
Capital expenditures represent the growing edge of the business.
Uncertainties or flexibilities are associated with capital projects. But traditional methods of evaluating capital projects handle cash flow forecasts as passive factors in decision making. It is very important that methods of evaluation of capital expenditures should take into account all shades of the character of capital expenditure that affect its future performances. Traditional available methods work on certain assumptions. As Richard A Brealey and others in their book ‘Principles of Corporate Finance’ have stated that “Discounted- cash- flow analysis commonly assumes that company holds assets passively and ignores the opportunities to expand the project if it is successful or bail out if it is not.” ...Download file to see next pagesRead More
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