Capital Budgeting Strategies

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Capital Budgeting Strategies
University of Phoenix
Strategic Financial Management
FIN 486

Capital Budgeting Strategies
Week Four of Strategic Financial Management discusses the chosen provided information for the proposal that concerns building a new factory and includes the incremental cash flows needed for the net present value, (NPV) analysis. The incremental cash flows identifies sales of $3 million a year that equals an increase in gross margin of $150,000 given a 5% gross margin and initial investment of $10 million that includes the cost of building the new factory (Gitman, 2009). The savage value at the end of the project life equals $14 million.
Given a 10% weighted average cost of capital, table 1 shows the computed NPV
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The PV of each of the cash flows calculated by multiplying the cash flow with the present value column.
If the weighted average cost of capital is 6%, the net present value equals -$1,078,460 as shown in Table 2 below higher than the net present value at 10% of the cost of capital.
Table 2 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) |

In the event of a 12% cost of capital, the NPV equals -$4,644,841 much lower than the net present value at a weighted cost of capital of 6% and 10%.
Table 3 Year | Cash Flow | PV Factor | Present Value | 0 | (10,000,000) | 1.0000 | (10,000,000) | 1 | 150,000 |
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