Capital Budget Mini-Case

should be the cost of capital and would like to determine it. You will assist in the process of

Cash inflows and outflows can occur at any time during the project. The NPV of the project is the sum of the present values of the net cash flows for each time period t, where t takes on the values 0 (the beginning of the project) through N (the end of the project).

Due to the NPV being a positive number listed in the above calculations it is my belief and will be the advantage of the company in question to go ahead with the project and expect a great return for their efforts. Cash flow is one of the most important facets of an organization. Net present value also known as (NPV) can be calculated before or after taxes ( CCIM Institute, 2007).

Net Present Value (NPV) is defined as the difference between the present value of cash inflows and the preset value of cash flows ("Net Present Value (NPV) Definition | Investopedia," n.d.) Businesses use the NPV in capital budgeting to determine if a project is cost-effective, a positive net present value means it was a positive investment and a negative net present value means the business lost money on the transaction. An example of using the formula of NPV in a case problem from the finance text book in chapter 13.

21. What is the net present value of a project with the following cash flows if the discount rate is 15 percent?

The Discount Payback Period (DPP) does consider the time value of money. It is computed somewhat like the PB method and the only difference is that DPP method uses the discounted cash flow. As we look at the DPP for Corporation A and Corporation B we see that again Corporation B is less time to pay back the cash flow:

The city engineers presented city council members with two projects that require large capital outlays. However, the economic downturn makes implementation of both projects impossible with current budget restraints. Therefore, the city council decided to conduct a cost benefit analysis to determine the most cost effective project. While neither project met all the requirements, data analysis determined that Option B was the best choice. However, city engineers pushed back stating that both projects are vital to the city. Consequently, it was necessary to consider an alternative solution. The proposal below provides a detailed explanation of all options including an alternative solution.

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of a projected investment or project. A positive net present value indicates that the projected earnings generated by a project or investment (in present dollars) exceeds the anticipated costs (also in present dollars). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept dictates that the only investments that should be made are those with positive NPV values.

The project will be analyzed with a net present value calculation. The future cash flows will be calculated and then discounted to present day, then tabulated so that the net present value of the project is determined. This NPV will allow management to make a decision with respect to whether or not the project should be undertaken or not.

If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital investment to break down the profitability of a projected investment or project.

Net present value (NPV) is a value approach that is the most accurate valuation in determining the capital budgeting of a company. NPV shows how exactly profitability a project will be. The NPV rules states that all the projects which have positive NPV should be accepted and for those that have negative NPV should be rejected. By simpler term NPV is the differences between the present values of cash inflow and outflows.

NET PRESENT VALUE: Sum of present values of future net cash flow - cost of project

One of the most important decisions a financial manager can make involves capital budgeting. Capital budgeting is used to determine which fixed assets should be purchased. The purchasing of fixed assets is a form of a long-term investment. Allocating funds in the capital account is a form of capital budgeting. A financial manager will determine if the purchase of a capital asset or fixed asset is worth more over that assets life then it is for the cost to purchase it. In other words, they make sure that the asset would get the amount it cost plus a profit in return.

The Net Present Value is one of the techniques that are used by firms when evaluating which investment proposals to take on board and which ones to reject. The net present value is calculated by discounting all flows to the present and subtracting the present value of all inflows.