Essay Capital Budgeting

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Capital Budgeting 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.
Explanation: Option A and
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The new capital cost for Option A is $-3,580,000.00 and for Option B is $-3,150,000.00. The net present value for Option A with a discount rate of 12 percent, capital cost of $-3,580,000.00, and benefits generated a negative net present value. While Option B with the capital costs $-3,150,000.00, a discount rate of 12 percent and benefits equaled a net present value of $763,122.00.
Project Justification: Option B While neither option meets all the criteria, Option B is the most cost-effective and efficient option of the two. Additionally, Option B's higher internal rate of return of nineteen percent provides the best re-investment opportunity for the future. Research shows that the internal rate of return "is and has been a popular measure of worth for purposes of project evaluation. It defines the return achieved by an investment (or true cost of a loan) and can often be viewed as a measure of efficiency" (Hartman & Schafrick, 2004, p. 139). Additionally, Option B has a positive net present value, while Option A has a negative net present value. In addition, the payback period for Option B is five years and the payback period for Option A is 7.475 years. In addition, the payback period for Option B is outside the city council's 2.75 years requirement. The long payback period should not disqualify Option B from city council members' decision-making process. Empirical tests show that "the net present value method is usually a better guide in the

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