two capital budgeting cases corporations (A and B) have different revenues values and expenses as well as variable depreciation expenses‚ tax rates and discount rates. The members of our team had to compute both corporate cases NVP‚ IRR‚ PI‚ Payback Period‚ DPP‚ and project a 5-year income statement and cash flow in a Microsoft Excel spreadsheet. The future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project’s cost of capital
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Chapter 2 Homework Problem 1: | Project Cost | Net Cash Flows | Payback | Project A | 250‚000.00 | 75‚000.00 | 3.33 | Project B | 150‚000.00 | 52‚000.00 | 2.88 | Project B is better. It is less risky because it has a payback period of 2.88 or 2 years and 10 months. Problem 2: Average Rate of Return: ? Annual Profits: 30‚000.00 Project Cost: 200‚000.00 Average Rate of Return = $30‚000/$200‚000 = 0.15 = 15% Problem 3: Year | Nominal Cash Flow | Discounted Cash Flow
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Part 1: Financial Appraisal techniques Part 2: Forecasting Part 1-Financial Appraisal Techniques Task 1. NET PRESENT VALUE (NPV) Year PROJECT X £000 Project Y £ 000 Discount Factor X Y 0 -200 -200 -200 -200 1 35 218 0.909 31.815 198.162 2 80 10 0.826 66.08 8.26 3 90 10 0.751 67.59 7.51 4 75 4 0.683 51.225 2.732 5 20 3 0.621 12.42 1.863 229 219 1)NET PRESENT VALUE (NPV) X= 229-200=29 Y=219-200=19 PAYBACK PERIOD: Cumulative Cash Flow Year PROJECT X £000 Project Y
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Q1. Please compare the advantages and disadvantages of the following investment rules: Net Present Value (NPV)‚ Payback Period‚ Discounted Payback Period‚ Average Accounting Return‚ Internal Rate of Return (IRR) and Profitability Index (PI). (You can start by considering the following questions for each investment rule: Does it use cash flows or accounting earnings? Does it consider all cash flows or not? Does it apply a proper discount rate? Whether the acceptance criteria are clear and reasonable
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share was £18‚800 with an average addition of £1‚100 per year2. The payback period for the project was 3.10 years‚ when considering the erosion of Rotterdam‚ this would increase to 3.46 years2. The net present value of Merseyside is £15.61 million and when considering erosion‚ the net present value is £11.37 million2. The internal rate of return is 33%‚ with the erosion‚ it is 28.2%2. Based on these four criteria‚ Merseyside is a valid project to consider. When considering the Rotterdam project
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capital budgeting analysis compares cash inflows and cash outflows instead of net income calculated using the accrual basis. Capital projects are typically evaluated using quantitative analysis and qualitative information. There are two capital budget evaluation processes that take into consideration the time value of money Net Present Value (NPV) and the Internal Rate of Return (IRR) (Edmonds‚ 2007). Time value of money is necessary when comparing possible business investments that have different
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analysis. | | | Evaluate capital investment proposals using average rate of return method‚ cash payback method‚ net present value method‚ and internal rate of return method. | | | Explain the advantages and disadvantages of various methods of evaluating capital investment proposals. | | | Explain the concept of the time value of money (present value and future value). | | | Contents: | Capital investment analysis is a process of planning‚ evaluating‚ and controlling investments
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In addition‚ it is only the incremental cash flows that interest us‚ because‚ looking at the project from the point of the company as a whole‚ the incremental cash flows are the marginal benefits from the project and‚ as such‚ are the increased value to the firm from accepting the project. 10-2. Although depreciation is not a cash flow item‚ it does affect the level of the differential cash flows over the project ’s life because of its effect on taxes. Depreciation is an expense item and‚ the
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1-Pay back period 2-Net present value 3-Internal rate of return 4-Profitability index These method are explained below‚ 1-PAY BACK PERIOD: Payback period is the exect length of time needed to recover the intial investment of the firm as calculated from the cash inflows. Payback period method is the least prices of all capital budgting methods because calculation is done in rupees and not adjusted from the time value of money. For examle the following
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