Minicase 8 Part 1
Chapter 8 Minicase
Proposal to accept Muster or Skilboro
This case is to decide between two proposals i.e. Munster and Skilboro. For analyzing different capital budgeting technique will be used by the company. Capital budgeting is concerned with investing in real assets (projects) and capital budgeting techniques help determine whether or not the investment will be profitable. It involves analyzing the cost of the investment and the cash flows that the investment is expected to generate over time.
Capital Budgeting basically refers to the decision making process that deals with the investment in fixed assets or long term projects. It helps in estimation of decisions regarding the expenditure concerns. It helps in tackling the outflows which results in long term gains. It also acts as a determining agent that evaluates the adequacy of returns. Careful analysis and reviews are necessary while taking these decisions. Parameters like cost, complexity, time and irreversibility are evaluated.
The calculations involved when applying four common techniques to investing project cash flows are as follows:
A. The payback is the time it takes for [Cumulative Cash Flows after t =0] to exceed [Cash Flow at t=0]
B. The internal rate of return (IRR) is the rate at which [Sum of Discounted Cash Flows from t=1 to t=n] = [Cash Flow at t=0]
C. The net present value is NPV is the sum of all Discounted Cash Flows, including the initial cash flow.
D. The profitability index (PI) is the (Sum of Discounted Cash Flows from t=1 to t=n)/(Cash Flow at t=0).
The NPV, IRR, and PI all give the same decision regarding whether or not to accept a single project with standard cash flows. Standard cash flows means that a single cash outflow (the investment) is followed by only positive cash inflows (or for a borrowing project a single inflow is followed by outflows), whereas a nonstandard cash flows may change signs from negative to positive (or vice versa) more than once. Yet, even for standard
Proposal to accept Muster or Skilboro
This case is to decide between two proposals i.e. Munster and Skilboro. For analyzing different capital budgeting technique will be used by the company. Capital budgeting is concerned with investing in real assets (projects) and capital budgeting techniques help determine whether or not the investment will be profitable. It involves analyzing the cost of the investment and the cash flows that the investment is expected to generate over time.
Capital Budgeting basically refers to the decision making process that deals with the investment in fixed assets or long term projects. It helps in estimation of decisions regarding the expenditure concerns. It helps in tackling the outflows which results in long term gains. It also acts as a determining agent that evaluates the adequacy of returns. Careful analysis and reviews are necessary while taking these decisions. Parameters like cost, complexity, time and irreversibility are evaluated.
The calculations involved when applying four common techniques to investing project cash flows are as follows:
A. The payback is the time it takes for [Cumulative Cash Flows after t =0] to exceed [Cash Flow at t=0]
B. The internal rate of return (IRR) is the rate at which [Sum of Discounted Cash Flows from t=1 to t=n] = [Cash Flow at t=0]
C. The net present value is NPV is the sum of all Discounted Cash Flows, including the initial cash flow.
D. The profitability index (PI) is the (Sum of Discounted Cash Flows from t=1 to t=n)/(Cash Flow at t=0).
The NPV, IRR, and PI all give the same decision regarding whether or not to accept a single project with standard cash flows. Standard cash flows means that a single cash outflow (the investment) is followed by only positive cash inflows (or for a borrowing project a single inflow is followed by outflows), whereas a nonstandard cash flows may change signs from negative to positive (or vice versa) more than once. Yet, even for standard