This paper “Chino Material Systems Inc: Capital Budgeting” presents a capital budgeting analysis envisioned to help the sales team of Chino Materials Systems Inc convince GP Manufactures to buy a proposed new machine of higher efficiency, production reliability as well as customer cost saving…
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In the financial data presented for GP Manufacturing, the initial investment outlay refers to the cost of the project which is usually a negative value. Secondly, the depreciation tax savings for each year has been apportioned over six year after which the project will not attract any federal or state taxation. The last component of cash flow statement relates to the projects incremental cash. It reveals that the company is reinvesting its returns at a similar rate to that of the cost of capital; hence the AT Cost Saving remains constant over the investment period.
Net Present Value
From the GP Manufacturing project’s cash flow, the NPV is determined to be $21,396.19. With this in mind, this positive NPV suggests that the envisaged project will add value to the company and thus the acquisition decision is viable. It is however possible to find that, the NPV of this company may differ from that of other companies with respect to Chino’s positions. This is attributed to the fact that different companies have varied costs of capital, thus justifying the possibility of diverse NPV.
The proposed IRR for this project is 14.42% as derived from Excel computations. It is worth noting that there could be more than one IRR, hence the need to ‘guess-function’ the rationale. In this case the IRR is greater than the 12% cost of capital for GP manufacturing. As such, it will be of good prudence to invest in the proposed new project presented by Chino Materials Systems Inc. ...
In this case the IRR is greater than the 12% cost of capital for GP manufacturing. As such, it will be of good prudence to invest in the proposed new project presented by Chino Materials Systems Inc. Payback period for GP Manufacturing From empirical accounting basis, the payback herein refers to the span of time in years which the company needs in order to recover the initial cash outlay. In this case, the PP for GP Manufacturing is 4.76 year. Typically, the concept of payback period relates only to the duration beyond which an investment may start generating positive return otherwise known as profits. However, exclusive use of payback period as a financial investment tool is never satisfactory since the concept does not provide explicit rational in capital budgeting on which an investment decision can be make. Besides, it lacks prerequisite basis on which comparison can be made against other proposed ventures. Chino Materials System Inc has several machines with varied properties including long useful life, efficiency, cost and reliability. In that case, the PP concept could be useful in determining which product to invest in. For instance, a machine with a short productive life may force the investing company to examine if it has a shorter PP. If not, then it will be inappropriate to invest in such project. On the other hand, a cost effective machine with long productive life would be suitable even if it has a longer payback period. That notwithstanding, the reciprocal of PP can only be useful as an evaluation tool to invest in products of long life to estimate the expected rate of return. Modified Internal Rate of Return With regard to the federal-plus-stare tax rate,
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