London Stock Market and Capital Budgeting - Essay Example

Winning in business is characterised by net profits. There are two ways of generating funds. They are borrowing and investing. The best place to invest funds is visiting the London Stock Exchange. The following paragraphs explains clearly why investing in capital assets is a risk that can be tailored to generate profits and not left to chance (Datta, and Jones 1999, 21). The above computation shows that sales for the first year is 7,000,000. The direct materials and variable operating expenses amount is 2,500,000.

The direct labor amount is 2,000,000. The factory overhead is arrived at by multiplying the direct labor amount by fifty percent. The amount arrived at is 1,000,000. The annual depreciation of 675,000 is arrived at by dividing the investment cost of the equipment amount of 3,375,000 by five years. The net profit result is 825,000.The cash inflow is arrived at by adding back the annual depreciation expense to the net income because there is no actual cash outflow generated by the depreciation expense.

The net cash inflow computed for the first year is 1,500,000. This generates a first year present value using the net present value discount table for varying annual cash inflows is 1,485,000(Dayananda et al. 2002, 5). The above computation shows that sales for the second year is 7,700,000. . The net profit result is 975,000.The cash inflow is arrived at by adding back the annual depreciation expense to the net income because there is no actual cash outflow generated by the depreciation expense.

The net cash inflow computed for the second year is 1,650,000. This generates a first year present value using the net present value discount table for varying annual cash inflows is 1,617,000. The above computation shows that sales for the third year is 8,400,000. The direct materials and variable operating expenses amount is 3,000,000. The direct labor amount is 2,400,000. The factory overhead is arrived at by multiplying the direct labor amount by fifty percent. The amount arrived at is 1,200,000.

The annual depreciation of 675,000 is arrived at by dividing the investment cost of the equipment amount of 3,375,000 by five years. The net profit result is 1,125,000.The cash inflow is arrived at by adding back the annual depreciation expense to the net income because there is no actual cash outflow generated by the depreciation expense. The net cash inflow computed for the second year is 1,800,000. This generates a first year present value using the net present value discount table for varying annual cash inflows is 1,747,000.

The above computation shows that sales for the fourth year is 6,300,000. The direct materials and variable operating expenses amount is 2,250,000. The direct labor amount is 1,800,000. The factory overhead is arrived at by multiplying the direct labor amount by fifty percent. The amount arrived at is 900,000. The annual depreciation of 675,000 is arrived at by dividing the investment cost