Capital Budgeting Scenarios Essay example

886 Words Oct 17th, 2012 4 Pages
Capital 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 of $3 million a year that will result in an increase of $150,000 in gross margin giving the company a 5% gross margin. 3. Value of salvage at the end of the life of the project of $14 million.
NPV Computation
The following table displays
…show more content…
The present value was figured out by using the following formula
PV Factor = 1/(1+r)^t r = cost of capital t = year
By multiplying the cash flow column with the present value column the present value of each of the cash flows was found.
Assuming the weighted average cost of capital is 6% on the other hand, the net present value would be negative $1,078,460, which is shown below, and this amount is higher than what the NPV was with a cost of capital of 10%. 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 | | NPV | | (1,078,460) |

On the other hand, using a cost of capital of 12% the NPV is still negative showing a negative amount of $4,644,841. These figures show that the 12% cost of capital is lower than the 6% cost of capital and higher than the 10% cost of capital. Year | Cash Flow | PV Factor |

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