Essay on "Capital Budgeting Analysis"
Essay 4 pages (1062 words) Sources: 2
[EXCERPT] . . . .
net cash flow for the second year would be if all cash expenses were as described in the scenario but there were no depreciation expenses. Explain the impact of depreciation on the net cash flow for the second year."The correct cash flow for the second year would be as follows:
3170000-2400000 = 770000 *.7 = 5390000 would be the cash flow. The impact of depreciation on the net cash flow is that the depreciation has provided a tax shield that is equal to 32% of 300000= 96000. Based on the results, the cash flow would be lower than this amount.
"Based upon your NPV analysis in part A2, make a recommendation to Entrepreneur D
regarding what decision to make. Explain why this is an appropriate action."
Based on the NPV analysis, Entrepreneur D. should undertake the project as the present value because all cash inflows is greater than the present value of all cash outflows.
"Based upon your IRR analysis in part A3, make a recommendation to Entrepreneur D
regarding what decision to make. Explain why this is an appropriate action."
Entrepreneur D. should undertake the project because the Internal Rate of Return is higher than the cost of capital, which is 12%.
4. "Explain why the accounting rate of return on this project is different from the internal rate of return for the same capital investment."
The reason is that the Accounting Rate of Return is based on profit while Internal Rate of Return is based on present value of cash flows. Additionally IRR considers time value for money while ARR does not
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Capital Budgeting is the process of analyzing an organizational investment decision especially when a company decides to invest in new equipments, plants, machineries and project. The process of calculating capital budgeting involves calculating the Internal Rate of Returns (IRR), Accounting Rate of Return and Net Present Value (NPV). Internal Rate of Return is the discount rate that makes the Net Present Value to become zero. And if IRR is greater than the cost of capital, the investment is viable. However, Net Present Value (NPV) is the present value of cash inflows subtracted from the present value of all cash outflows, and if NPV is greater than zero or positive, the investment is viable.
On the other hand, Accounting Rate of Return (ARR) s is the average annual income derived from a project divided the initial investment.
There are several reasons why accounting rate of return on this project is different from the internal rate of return for the same capital investment.
First, accounting rate of return uses accounting profits in the capital budgeting while internal rate of return uses cash inflows. For example, the application of accounting profits is subject to different of accounting treatment which affecting bottom line of profits.
Typically, ARR could be calculated using book value project net income and it does not make use of cash flow. Unlike the ARR, the IRR make use of cash flows data for the value of the investment. Unlike IRR, which is making the business decision on cash flows, the ARR is not suitable for project evaluation decision because… READ MORE
Quoted Instructions for "Capital Budgeting Analysis" Assignment:
“Hello. I will send two additional documents to support this request.One document outlines the specifics of this *****"paper*****" and the second one is the capital budgeting analysis spreadsheet. This request consists of the following components based on a given scenario provided in one of my attachments:
A. Complete the attached *****Capital Budgeting Template***** by doing the following:
1. Calculate the net cash flow that should be used for each year in the discounted cash
flow analysis.
2. Calculate the net present value (NPV) of this project using a discount rate equal to
the company*****s weighted average cost of capital. Round all dollar amounts to the
nearest whole dollar.
3. Calculate the expected yield on the project using the discounted cash flow internal
rate of return (IRR) method. Round all dollar amounts to the nearest whole dollar.
4. Calculate the accounting rate of return for this project.
5. Calculate the unadjusted payback period. State your answers in years and months.
B. Prepare a computer-based presentation in which you do the following:
1. Identify what the correct net cash flow for the second year would be if all cash
expenses were as described in the scenario but there were no depreciation expense.
a. Explain the impact of depreciation on net cash flow for the second year.
2. Based upon your NPV analysis in part A2, make a recommendation to Entrepreneur D
regarding what decision to make.
a. Explain why this is an appropriate action.
3. Based upon your IRR analysis in part A3, make a recommendation to Entrepreneur D
regarding what decision to make.
a. Explain why this is an appropriate action.
4. Explain why the accounting rate of return on this project is different from the internal
rate of return for the same capital investment.
5. Explain the relative significance of the unadjusted payback period in this decision
situation.
6. Explain how the weighted average cost of capital should be used in capital budgeting
analysis when utilizing the NPV method.
7. Explain how the weighted average cost of capital should be used in capital budgeting
analysis when utilizing the IRR method.
**Please do not change the student name boxes on the spreadsheet (line 5) as they are what trigger the data pre-population.** Thanks!
Once you receive the attachments, please let me know if there are any questions. Thank you!
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How to Reference "Capital Budgeting Analysis" Essay in a Bibliography
“Capital Budgeting Analysis.” A1-TermPaper.com, 2012, https://www.a1-termpaper.com/topics/essay/net-cash-flow/92671. Accessed 4 Oct 2024.
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