Capital Budgeting Analysis
Amanda Kocanda, DeUndre’ Rushon,
HuongTran,& Morgan Gibreal
MBA 612, Financial Strategy
October 28, 2014
Within this paper, an overview of the general capital budgeting process and how it is implemented within organizations is defined and reported. Key terms related to capital budgeting are also defined. Risk analysis based on the Net Present Value (NPV) is performed on the salvage values before and after sales tax values along with the different sale ranges.
Keywords: NPV, NPV Profile, NPV, IRR, multiple IRRs, ranking conflict of NPV vs. IRR, payback period, profitability index, discount rate, cost of capital concept, cash flow analysis, cash flow timeline,…show more content…
IRR is the compounded annual return on a project, given its up-front costs and subsequent cash flows.
Multiple IRRs when cash flows of a project change sign more than once, there will be multiple IRRs; in these cases NPV is the preferred measure.
A mutually exclusive project means that if one project is accepted it eliminates the other project(s) from consideration. Projects that are said to be mutually exclusive cannot be undertaken simultaneously.
Non-conventional cash flow stream a series of inward and outward cash flows over time in which there is more than one change in the cash flow direction. This contrasts with a conventional cash flow, where there is only one change in cash flow direction. In terms of mathematical notation where the negative sign represents an outflow and the positive sign denotes an inflow; non-conventional cash flow would appear as negative, positive, positive, negative, and so on with no particular order.
Net Present Value (NPV) equals the sum of its cash inflows and outflows, discounted at a rate that is consistent with the project’s risk. NPV can be calculated by first, writing down the total net cash flow over the life, discount it by the rate, and then add up all the discounted cash flows to get the NPV. NPV’s that are greater than zero are considered valuable investments.
NPV<$0: Do not invest
NPV = CF0 + CF1/(1+r)^1 +