Capital Budget Recommendation

Now we want to examine the analysis business report concerning the cost of capital that has been increased at 28% in accordance with the Net Present Value which is $500,000 the question being would still be worth it to make the investment to the company (Needles, 2010). While at the same time the internal rate of return is still at 21% which is lower than the 25% in the expenditures. In reflection of these calculations the investment would not

Guillermo’s furniture store needs to select the option which is good for them and can provide competitive advantage to the store. It has been clear that managers are responsible for the use of capital budgeting techniques to find out exclusive project. We have different types of capital budgeting techniques. These capital budgeting techniques are:

A capital budget is very important for a business. It is a heated subject because a decision about capital budgeting can help the business to determine if the proposed investments or project are worth taking or not. There are two things that a business has to take into consideration when it is making a capital budget decision. First there are financial decisions that have to be made. Second, there is an investment decision that is also

Capital budgeting decisions involve investments requiring large cash outlays at the beginning of the life of the project and commit the firm to a particular course of action over a relatively long period of time. As such, they are costly and difficult to reverse, both because of: (1) their large cost and (2) the fact that they involve fixed assets, which cannot be liquidated easily.

Annotated Bibliography: The Impact of Healthcare Reform on Capital Budgeting Carolann Stanek University of Mary Annotated Bibliography: The Impact of Healthcare Reform on Capital Budgeting Burt, J.C. & Voss, J.Z. (2012). Capital spending in the current healthcare environment. Health Capital, 5(4).

The Modified Internal Rate of Return is an underused measure for selection of projects that a company can choose because it is more effective at dealing effectively with periodic free cash flows that develop from the time that an asset is purchased through its life to the point where it is sold, ranking projects and variable rates of return through the project life. The Internal Rate of Return is an inefficient model to make decisions with because it lack the ability to account for the periodic free cash flows, proper ranking and variable returns from certain projects.

10) Investment A requires a net investment of $1,600,000. The required rate of return is 12% for the four-year annuity. What are the annual cash inflows if the net present value equals 0? (rounded)

Don Hofstrand (2013) states that, capital budgeting that progression or technique that comprises the approximation of financial viability of the capital investment over the duration of the investment. He also states that unlike the other investment analysis techniques, it does focus on cash flows instead of profits. That is it aims at recognizing cash flow in and cash flow out. Don Hofstrand(2013) further states that there are a number of capital budgeting techniques that are at disposal to be used in the process of examining economic feasibility of a capital investment. They actually include payback period, discounted payment period, net present value, profitability index, internal rate of return and last but not least is the modified internal rate of return.

C) What is the project’s internal rate of return (IRR)? Explain the economic rationale behind IRR.

If I was going to prepare a capital expenditure budget request to add a retail pharmacy in the hospital my first choice of two individuals I want on my team is the manager over the hospital current pharmacy. They would have general knowledge based on the hospital patients what illnesses and medicines are common to deal with and give us a valuable perspective on costs, space and displays. In our text (Smith, 2014) " The manager of the hospital pharmacy can control the number of pharmacists and technicians employed relative to patient volume and technicians employed relative to patient volume and the expense for the management of the pharmacy. All of the factors I mentioned is important with establishing a capital expenditure budget. The other

comparison with other available investments. In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.

When considering potential investments it is important to know the present value of the investment so the firm knows how much to invest in order to reach a predetermined profit. The first investment opportunity involves an eight point five percent return rate over six years with a predetermined payout of twenty four thousand dollars. The initial investment amount must be determined. In order to do so, the present value will need to be calculated. This is done by using the present value equation, future value/ (1+R)^n. When calculated the company should initially invest fourteen thousand seven hundred and eleven dollars. This initial investment predicts a return on investment of twenty four thousand

The initial investment rate of return (IIRR) method also overlooks the time value of money. The IIRR method considers the effects of taxes and depreciation on investments. This is something that is overlooked by the payback method. The IIRR method however, does not take into account operating cash flow, which can be a significant consideration. Senior management is more likely to buy in if the IIRR is greater than the cost of capital to the organization (McCrie,

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

The internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals.