Capital Budgeting - Research Paper Example

Capital budgeting Question Solutions: YEAR 0 2 3 4 CF 000,000 $450,000 $350,000 $300,000 $250,000 COST OF CAPITAL = 8% NPV NPV =  NPV =  NPV = (416667 + 300068+238149+183757)- 1000000 NPV= $13,864. IRR Using trial and error: For 14%,  +  For 15%,  +  For 14.7%,  +  1,000,000 Therefore: IRR= 14.7% Simple Payback YEAR 0 1 2 3 4 CF $ -1,000,000 $450,000 $350,000 $300,000 $250,000 CCF -1,000,000 -550,000 -200,000 -100,000 150,000 Payback period = A + B/C = 3 + 10,000 / 250,000 = 3.4 YEARS. NPV is theNETpresentvalue of post-tax cashflows less theinitialinvestment.

It shows the difference between the market value of the project and its cost. AproA projectject is onlyacceptableifthe NPV is more than zero. Since the NPV calculated $NPV= 13,864 is positive, itmeansthatthedecision is expected to addvamostly utilithe companyzedlue to thecompany. NPV how this decisionis a vivreach these objectiveidanddirectmeasure of howthisdecision will reachthesetobjective. This method is themostcrucialalterit isnative to NPV; itis mostlyutilized in practiceinterest interesrates ratest. Itfocusesentirely on the approximated cashflows, and it doesn’tnditdoesn’t depend on interestinterest ratesrates evidenced elsewhere.It focuses entirely

Thevaluecalculated is IRR= 14.7%. Since this thevalue calculatecalculated thisdluthis valuevalue the valuethevalue the required rreturneturne is above therequiredrethe rreturn turnequired returnturn, it has a positiveimpact on this project. Payback is the countcalculate calculated of events after which theinitialinvestmethe costs are recovered. The primary concern employedarycthe target periodoncernemployed in money back payback period is thetimetakethe time taketakennn to gettmoney backheinitialamount of moneyback in a nominal sense. The value obtained in the positive impactlculations, in thInvesinvestmegains instrument gainsis case, was 3.4 years, which is less than thetargetperiod. Therefore, the payback period is acceptable. InvestmInvestment gainsentgains in the company can be measured by the use of NPV, IRR, or payback.

Since cash flows occur in the future of the project, the calculation'sons' life is considered more uncertain, these tools provide an indication of howcertaintheprojectcash inflows are. In this case, the investment cost will be recovered within the targeted period this is a significantgainforthe firm. In this project, of all the methods, each method has its level of impact on the project. The method that would be most effective is NPV. This reason is that in thecalculation, after and before cashflows are considered. More also, productivityandotherrisks are prioritized so as to maximizethe company’s worth.

On maximizing the theotherer side, the method with the least effect is simple payback. This process is negatively biased on new and long-term investment projects (Campbell, Cheramy, & INTELECOM Intelligent Telecommunications (Firm), 2012). Outsourcing is the strategy where businesses move some of their functions from within the organization to an outside provider of the service. To successfully implement outsourcing, a lot of commitment is needed from top to down management and also a huge understanding of all the phases of outsourcing required.

The benefits a business gains from the application of this strategy can be seen both from the operational and strategic points of view. Businesses will normally go for outsourcing as a means of lowering the short-term direct costs (operational impact). Nevertheless, strategic outsourcing is capable of leading businesses to lower their long-term capital investments and leverage their key competencies significantly (strategic impact). Cost reduction motive: the outsourcer can experience lower logistics costs due to the increased efficiency of the work that the office duties will be handled by the outsourcing firm, which will lead to increased profits.

Improved logistics service: improved delivery of services by the organization can be a result of benefits from the third-party logistics provider’s increased levels of service consistency. This enhances efficiency and can lead to higher customer satisfaction Capital budgeting is a decision-making process that involved the managers making major decisions while investing in long-term assets such as land, and buildings. Net present value is a significant capital budgeting method; it puts into consideration the present costs of a project against the present value of gains that a capital investment can generate during the economic life of the project.

This is basically a subtraction of the present value of benefits from the present value of the cost of a particular project. Present Value Cost is the initial cost of capital investment. To get the Present Value Benefit, projected cash inflows of each year are multiplied by a minimum rate of return at market rates, normally referred to as the cost of capital, for each year of the economic life of a fixed asset. Add the Present Value Benefit of all the years and subtract the Present Value Cost from the sum to get the Net Present Value.

Select the project with a positive Net Present Value for independent capital assets and one with the highest Net Present Value for mutually exclusive capital assets. Net present value takes into consideration the time value of money. It is therefore more dependable than other investment appraisal methods which fail to discount future cash flows, an example being the payback period and accounting rate of return. The accounting rate of return is a technique used to compare the expected profits from an investment with the total amount you needed for investment.

With the application of the method, the average annual profit expected over the useful life of the investment project is compared with the average amount of capital invested in the same project. This is unlike other approaches to investment appraisal, the accounting rate of return is based on profits rather than cash flow. So it is affected by subjective, non-cash items such as the rate of depreciation you use to calculate profits. The accounting rate of return also fails to take into account the timing of profits.

References Campbell, C., Cheramy, S., & INTELECOM Intelligent Telecommunications (Firm). (2012). Capital budgeting. (Money flow.) Pasadena, CA: INTELECOM.