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Capital Budgeting - Essay Example

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Capital budgeting is needed when "almost all firms recognize that they face major uncertainties about the future, yet most firms' strategic investment decisions are primarily based on a single projection of future events. Although managers do recognize that the failure to include a consideration of uncertainty can lead to costly errors, the difficulty of such planning leads many to ignore the potential costs and hope that serious problems will not arise."(Trigeoris, 1995; p 31) Thus, companies may need to make strategic decisions on whether to buy a new building, a new equipment, to extend the building a few floor up, or even to make major repairs on its buildings and factory sites…
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Capital Budgeting
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Download file to see previous pages And when we search for scientifically viable definitions of these basic concepts, we discover that a debtor who is illiquid is a debtor who is temporarily unable to pay his or her debts, whereas the insolvent debtor is permanently unable to pay his or her debts. Time is thus an element in
the concepts. A problem of invisibility arises with regard to solvency/insolvency because the solvency or insolvency of business enterprises is not apparent in traditional financial statements, even though such state ments claim to give a "true and fair view." Consequently, traditional financial statements are worthless as a means of describing the financial position of business enterprises."(Kirdegaard, 1997, p.39)
Using the time value of money approach, the total first class airline tickets bought at $.1,300 less the flier discount of $200 would translated to the following data below. The total tickets from year 1 to year 10 is $2,807,200 as indicated in the above computation. The present value of the $2,807,200 is $1,917,843. This is computed because the company has entered into a ten year contract with the airline company resulting to a flier discount. The difference between the cost and present value is $889,357.04 or thirty two percent (32) of the cost of ten year contract tickets. This is the amount that the company will save if this alternative is chosen(Ross, 1996;p179-206).
Year
1
2
3
4
5
Flights per year
50
53
56
59
62
at 4 persons per flight
200
212
224
236
248
First Class $1,100
220,000
233,200
246,400
259,600
272,800
Year
6
7
8
9
10
Flights per year
65
68
71
75
79
at 4 persons per flight
260
272
284
300
316
First Class $1,100
286,000
299,200
312,400
330,000
347,600
Alternative 2
PV factor
Cost
2,500,000.00
Present Value
10 payments 14%
250,000
x
5.2161
=
1,304,025.00
Present Value
325,000
x
0.2697
(87,652.50)
Difference
1,195,975.00
0.48
Using the time value of money approach, the present value of the ten year installment payments amounting to $250,000 is $ 1,304,025. Also, the present value of the scrap value when the airplane will lose its flying use and will be sold is $ 87,652.50 which is deducted from the present value of the airplane purchase. The difference between the cost and the present value where the $2,500,000 is paid in ten equal annual installments is $1,195,975. This can ...Download file to see next pagesRead More
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