865 WordsApr 7, 20134 Pages

Capital Budgeting Scenario
Proposal A: New Factory
A company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:
• Building a new factory will increase capacity by 30%.
• The current capacity is $10 million of sales with a 5% profit margin.
• The factory costs $10 million to build.
• The new capacity will meet the company’s needs for 10 years.
• The factory is worth $14 million over 10 years.
On the current proposal for building the new factory below will explain the analysis needed for the projection of the incremental cash flows that will be used for the NPV analysis.*…show more content…*

This calculation for the proposal of the new project is done over a time period of 10 years. The return in this case the negative return of the life of the factory includes the $14 million in expected return from selling the factory. The present value formula which considers time and value was also included in the expected recovery.
The next table shows the present value of each cash flow. Cash flow was multiplied with the PV column. The net present value is $1,078,460 also negative, which results in being higher than the NPV at %10. The weighted cost of capital is %6. Year | Cash Flow | PV Factor | Present Value | 0 | (10,000,000) | 1.0000 | (10,000,000) | 1 | 150,000 | 0.9434 | 141,509 | 2 | 150,000 | 0.8900 | 133,499 | 3 | 150,000 | 0.8396 | 125,943 | 4 | 150,000 | 0.7921 | 118,814 | 5 | 150,000 | 0.7473 | 112,089 | 6 | 150,000 | 0.7050 | 105,744 | 7 | 150,000 | 0.6651 | 99,759 | 8 | 150,000 | 0.6274 | 94,112 | 9 | 150,000 | 0.5919 | 88,785 | 10 | 14,150,000 | 0.5584 | 7,901,286 | | Net present value | (1,078,460) |
If cost of capital was at %12 this would result in the net present value

Related

## Capital Budgeting Scenarios Essay example

886 Words | 4 PagesCapital Budgeting Scenarios Shannan Coleman FIN/486 September 23, 2012 Sal Sadiq Capital Budgeting Scenarios Capital Budgeting: Proposal A – New Factory Proposal A is to build a new factory to decide if this would be a feasible move for the company they need to perform a net present value analysis. To do this they will only need to look at the incremental cash flows, which are as follows: 1. Initial investment of $10 million that will be the cost to build the new factory. 2. Sales

## Capital Budgeting

1414 Words | 6 PagesWeek 4 Discussion Question 1b Introduction Capital budgeting is one of the most crucial decisions the financial manager of any firm is faced with...Over the years the need for relevant information has inspired several studies that can assist firms to make better decisions. These models are assigned so that they make the best allocation of resources. Early research shows that methods such as payback model was more widely used which is basically just determining the length of time required for the

## Risk Analysis on Investment Decisions

955 Words | 4 Pagesand medical and scientific instruments. Hal Eichner, SAI’s Chairman, has a two-point agenda for the company to increase market share and keep pace with technology. As the Financial Analyst for the company one must analyze two mutually exclusive capital investment proposals. The two options are to expand the existing Digital Imaging market share or enter the Wireless Communication (W-Comm) market (UOP Simulation, 2008). Shareholders in organizations like to invest in projects that are worth more

## DECK ROMANIA CASE ANALYSES 2

1190 Words | 5 PagesStudent #: 1480510 Introduction Capital budgeting is the most important management tool that enables managers of the organization to select the investment option that yields comprehensive cash flows and rate of return. For managers availability of capital whether in form of debt or equity is very limited and thus it become imperative for them to invest their limited and most important resource in perfect option that could prove to beneficial for the organization in the long

## Capital Budget : Capital Budgeting Essay

1838 Words | 8 Pagesproject’s potential cost and benefit, this analysis is known as capital budgeting. Authors Besley & Brigham of the text book CFIN 4, 4th Edition explain, “Thus, the capital budget is an outline of planned expenditures on fixed assets, and capital budgeting is the process of analyzing projects and deciding (1) which are acceptable investments and (2) which should actually be purchased.” (Besley & Brigham, 2015, pg. 145). Creating a capital budget and forecast that is as close as possible to the realized

## Capital Budgeting Techniques : An Assessment Of Wheel Industries On Their Procedures Regarding Long Term Investment Opportunities

1547 Words | 7 PagesCAPITAL BUDGETING TECHNIQUES Rajesh TK ARGOSY UNIVERSITY Financial Management M5 Assignment 1 Dr. Russell Corpron February 16, 2015 CAPITAL BUDGETING TECHNIQUES The rationale of this report is to make an assessment of Wheel Industries on their procedures concerning long-term investment opportunities. This report will offer a detailed design of the employment of more than a few techniques for assessing capital projects, in addition to, the expected projected cash flows, the firm’s average

## Cash Flow Estimation And Capital Budgeting

933 Words | 4 PagesTrident University Beverley Lionel Module 3 Case: Cash Flow Estimation and Capital Budgeting FIN 501 Strategic Corporate Finance Dr. Edward Kaplan May 21, 2017 ABC Golf Equipment Corporation Memo to the CEO, Mr. Hillbrandt To: The CEO, Mr. Hillbrandt From: Chief Financial Officer Date: May 21, 2017 Subject: Estimating Project Cash Flows Introduction If the manufacturer plans on using debt to finance the project, should the estimated project cash flows be changed to reflect these

## Capital Budgeting Techniques

4020 Words | 17 PagesABSTRACT This report describes capital budgeting techniques such as NPV (The NPV of an investment is the difference between its market value and its cost, IRR (The IRR is the discount rate that makes the estimated NPV of an investment equal to zero. PAYBACK (The payback period is the length of time until the sum of an investment’s cash flows equals its cost), discounted payback period (The discounted payback period is the length of time until the sum of an investment’s discounted cash flows equals

## Capital Budgeting Decision : An Argument

949 Words | 4 Pagesa growing prosperous organization. Capital budgeting decision is considered to be the most important and crucial decision among the four decisions mentioned above because it, to a great extent, influences the survival, growth and value of a business enterprise. In the words of Porwal (1976), “Capital budgeting is one of the important vehicles to achieve objectives of a business concern”. Van Horne (1994) provides an argument according to which capital budgeting decision is the most important of the

## Capital Budgeting: An Important Factor in a Company's Survival and Future

896 Words | 4 PagesCapital Budgeting Deciding if it is time to buy a new car can certainly be influenced by the amount of money that will be tied up for the next several years. For the average person, it could be a very precarious decision, especially with the volatility of the economy. There are many factors to consider when making major purchases such as time, money, resale value, and overall necessity. Whether it is a personal budget or a budget for a multi-million dollar company, trying to predict what will

### Capital Budgeting Scenarios Essay example

886 Words | 4 Pages### Capital Budgeting

1414 Words | 6 Pages### Risk Analysis on Investment Decisions

955 Words | 4 Pages### DECK ROMANIA CASE ANALYSES 2

1190 Words | 5 Pages### Capital Budget : Capital Budgeting Essay

1838 Words | 8 Pages### Capital Budgeting Techniques : An Assessment Of Wheel Industries On Their Procedures Regarding Long Term Investment Opportunities

1547 Words | 7 Pages### Cash Flow Estimation And Capital Budgeting

933 Words | 4 Pages### Capital Budgeting Techniques

4020 Words | 17 Pages### Capital Budgeting Decision : An Argument

949 Words | 4 Pages### Capital Budgeting: An Important Factor in a Company's Survival and Future

896 Words | 4 Pages