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Increase or decrease in inventories also increases or decreases the net revenues. Any item that increases or decreases the net revenues should be included in the cash flow…
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Download file to see previous pages However, the yearly interest expense should be included in the cash flow table since it contributes to the net expenses which reduce the net income amount.
c) The depreciation allowance should be included in the cash flow table since depreciation occurs yearly or continuously. The only difference is the rate of depreciation per year which should be taken into consideration. The $18,000,000 new investment, is only included in the cash flow table if the investment took place within the years whose cash flows were being determined, however, it should only be included in the very year it occurred.
I would therefore recommend the board of working computers, under payback period, to invest the $18,000,000 in Bernoulli since the initial investment will be paid back only during the second year of operation where the net cash flow will be $20,385,808.
Following the NPV calculations above, the NPV is $30,794,219/ the general criterion for NPV is that, a project is accepted if it has a positive NPV. A higher NPV is even more preferred. In this case, if working computers invest $18,000,000 in Bernoulli, the NPV is positive hence I would advise them to invest in the project.
The general criterion on IRR is that, the project is accepted if the IRR is greater than the cost of capital. The cost of capital here is 14.5% and IRR is 66.98%. Therefore, I can recommend that the working computers should invest on the Bernoulli since the IRR is greater than the cost of capital.
Working computers would use the sensitivity index to make a proper decision on whether to contribute $18,000,000 to the Bernoulli division. A part from the sensitivity calculated above, the Company can also use NPV, IRR and the payback period methods to make an informed decision on whether to contribute to the Bernoulli Division, $18,000,000 for the project.
To begin with, a negative sensitivity always means that, the output (Net present Value) decreases with an increase in the cost of ...Download file to see next pagesRead More
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