Capital Budgeting
Rediform Concrete Corp. Should They Invest or Not?
Table of contents:
I. Executive summary
II. Statement of Problem
III. Analysis & Methodology
IV. Discussion of Results
V. Conclusion
VI. Attachments
I. Executive Summary
The objective of financial management is to always make decisions in order to maximize shareholder wealth. They do this by different methods; one of them is by investing in projects that will maximize the value of the firm. However, many analyses should be made before making the decision to invest in determinant projects. The process by which the firm decides which investment is most profitable is called capital budgeting. There are different methods by which a firm can find the economic valuation for a project: net present value (NPV), internal rate of return (IRR) and profitability index (PI). Even though the firm has different evaluation methods to help it decide which project to choose, the decision is not always very clear. For instance, the future cash flows provided by the project to the firm are not always apparent. It is very obvious that different projects will have different revenues and different risks associated with them. For instance, financial managers need to understand what can go wrong with different investment projects before they make the decision of investing. This is when they implement sensitivity analysis.
Sensitivity analysis is a calculation, which takes into account present value for one value or several values that will affect the investment. For instance, net present value in an investment can be easily affected by salvage value and sales. When financial managers are faced to choose different projects to invest in, they are allowed to implant independent projects or mutually exclusive projects. Independent projects are the ones, which, as their name implies, are independent
Table of contents:
I. Executive summary
II. Statement of Problem
III. Analysis & Methodology
IV. Discussion of Results
V. Conclusion
VI. Attachments
I. Executive Summary
The objective of financial management is to always make decisions in order to maximize shareholder wealth. They do this by different methods; one of them is by investing in projects that will maximize the value of the firm. However, many analyses should be made before making the decision to invest in determinant projects. The process by which the firm decides which investment is most profitable is called capital budgeting. There are different methods by which a firm can find the economic valuation for a project: net present value (NPV), internal rate of return (IRR) and profitability index (PI). Even though the firm has different evaluation methods to help it decide which project to choose, the decision is not always very clear. For instance, the future cash flows provided by the project to the firm are not always apparent. It is very obvious that different projects will have different revenues and different risks associated with them. For instance, financial managers need to understand what can go wrong with different investment projects before they make the decision of investing. This is when they implement sensitivity analysis.
Sensitivity analysis is a calculation, which takes into account present value for one value or several values that will affect the investment. For instance, net present value in an investment can be easily affected by salvage value and sales. When financial managers are faced to choose different projects to invest in, they are allowed to implant independent projects or mutually exclusive projects. Independent projects are the ones, which, as their name implies, are independent