Capital Budgeting Essay

Internal Rate of Return is a discount rate in which the net present value of an investment becomes zero. The investment should be accepted if the IRR is not less than the cost of capital. The IRR measures risk, by showing what the discounted rate would have to reach to lose all present value. Futronics Inc. investment would have an IRR of 14.79%. The investment should be accepted since it is greater than the 8% cost of capital. The 14.79% IRR shows the growth expected from the

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.

The American Dream is the national ethos that people’s lives would better and more abundant with many opportunities. Although the “American Dream” is still possible, many minorities, a vast portion of people in low to middle class, are affected by the lack of social mobility. As a result, minorities fail to have a sense of the realization of the American Dream because of the fewer advantage and more problems we have to endure. Some advantages comes from the upper class and how they are fortunate to be wealthy to obtain good education and wealth. Ultimately, minorities are suffering within our society because we face intersectionality issues, having fewer opportunities, and are often struggling The article by Steve Lopez, “ LA’s Crisis:

My family has many traditions one of them is to make tamales on Christmas Eve so they are ready for Christmas Day. My family stays up on Christmas Eve and we stay up all night till the clock hits 12:00, that is when we start opening presents. Later on we go to sleep/take a nap and wake up so we can do El Nacimiento de Dios. El Nacimiento de Dios is when our family gathers around the setting of where Jesus was born and "we see his birth". We usually do a posada which is huge dinner with many types of Mexican foods like tamales, posole, rice, beans, etc. Each year my grandma, grandma, uncle, aunt, and some cousins come for Christmas from Mexico and we have a family gathering where we meet our family members in which we have not seen for a long

1- Basically we first have to find the incremental cash flows and then calculate the NPV. If the NPV is higher than zero; we are going to accept the Project. In order to find the cash flows we need to do the following steps:

In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this

A project may have more than one IRR, especially when returns of an investment yield negative cash flows following positive cash flows.

The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include:

4. Based on the information provided in the case, our group calculated the NPV for the project under both tax environment and tax-free condition, respectively, by using the excel spreadsheet and the NPV function. (For a detailed calculation of NPV, please refer to Appendix Under 15-yr.) According to our calculation, we have the following results: In the first case scenario, which the firm is in a tax environment (35% income tax), the NPV of the project equals to -$6,366,054.53

Johnson Controls, Inc. is a global company that offers services and products aimed at optimizing operational efficiencies and energy of buildings, electronics, automotive batteries and interior systems for automobiles. The company’s headquarters are located in Milwaukee, Wisconsin and is listed on the New York Stock Exchange as a fortune 500 company. Johnson Controls predicts that it will be able to increase its capital expenditures investments by $1.7 billion approximately. Most of the planned capital spending by the company will go to financing margin expansion and growth opportunities. This essay highlights the importance of companies to be able to evaluate investment decisions so that current and capital expenditure on proposed projects and schemes can be done prudently to ensure the company’s success (Johnson Controls (2015).

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

NPV analysis uses future cash flows to estimate the value that a project could add to a firm’s shareholders. A company director or shareholders can be clearly provided the present value of a long-term project by this approach. By estimating a project’s NPV, we can see whether the project is profitable. Despite NPV analysis is only based on financial aspects and it ignore non-financial information such as brand loyalty, brand goodwill and other intangible assets, NPV analysis is still the most popular way evaluate a project by companies.

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

1. Introduction 2. Analysis of current position 3. Analysis of new project 3.1 Methodologies and processes of Valuation 3.2 processes of Valuation 4. Conclusion

Chesire, G; Fifoot, C and Furnston, M. (2002) Law of Contract, 15th Edition, Oxford University Press