Capital Budgeting Management - Essay Example

Capital Budgeting Management In coming up with the best choice among the three possible investment alternatives faced by Round Rock Corporation, we have to consider the rate of return and the project life to be applied. The first choice, the construction of the building does not have a required rate of return while the construction of a pool hall and the purchase of a new washing machine require 15% and 10% required rate of return, respectively. It should also be noted that the projects have different life span-20 for the first alternative, five for the second, and ten for the third.

In order to compare the three alternatives, this paper will use the highest required rate of return (15%) and life span (20 years.) The cash flow for alternative 1 is shown below: Meanwhile, the cash flow for alternative 2 is as follows: However, based on our aforementioned assumption, we need to adjust the life span of this alternative to 20. Thus, total NPV equals:= $227935 + ($227935)/(1.15)4 + ($227935)/(1.15)8 + ($227935)/(1.15)12 + ($227935)/(1.15)16=$449, 701.4 The cash flow for the third alternative is: Adjusting the life span, we get the NPV of:= -$34, 430 + ($34,430)/(1.15)10= -$4278.

13 From the above computations, it becomes apparent that the second alternative is the most profitable investment. The NPV of alternative 2 is far greater than the amount computed in this analysis as the required return on 10% is lower than the 15% used in the computation. Also, this is the best choice as the company doesn't have enough resources. Note that the company's value is negative, indicative of its unstable financial condition.