Capital Budgeting Decisions

Capital Budgeting Decisions
Capital budgeting (or investment appraisal) is the planning process used to determine whether an
organization 's long term investments such as new machinery, replacement machinery, new plants,
new products, and research development projects are worth pursuing. It is budget for major capital,
or investment, expenditures.[1]
Many formal methods are used in capital budgeting, including the techniques such as * Accounting
rate of return * Payback period * Net present value * Profitability index * Internal rate of return *
Modified internal rate of return * Equivalent annuity * Real options valuation
These methods use the incremental cash flows from each potential investment, or project.
Techniques based on ... Show more content on Helpwriting.net ...
Nevertheless, for mutually exclusive projects, the decision rule of taking the project with the highest
IRR – which is often used – may select a project with a lower NPV.
In some cases, several zero NPV discount rates may exist, so there is no unique IRR. The IRR exists
and is unique if one or more years of net investment (negative cash flow) are followed by years of
net revenues. But if the signs of the cash flows change more than once, there may be several IRRs.
The IRR equation generally cannot be solved analytically but only via iterations.
One shortcoming of the IRR method is that it is commonly misunderstood to convey the actual
annual profitability of an investment. However, this is not the case because intermediate cash flows
are almost never reinvested at the project 's IRR; and, therefore, the actual rate of return is almost
certainly going to be lower. Accordingly, a measure called Modified Internal Rate of Return (MIRR)
is often used.
Despite a strong academic preference for NPV, surveys indicate that executives prefer IRR over
NPV[citation needed], although they should be used in concert. In a budget–constrained
environment, efficiency measures should be used to maximize the overall NPV of the firm. Some
managers find it intuitively more appealing to evaluate investments in terms of percentage rates of
return than dollars of NPV.
Equivalent annuity method[edit]
Main article: Equivalent annual cost
The equivalent
... Get more on HelpWriting.net ...

Finance Mini Case Chp11
Mini Case Chapter 11 a. What is capital budgeting? Capital budgeting is the decision process that
managers use to identify those projects that add value to the firm's value, and as such it is perhaps
the most important task faced by financial managers and their staff. The process of evaluating
projects is critical for a firm's success. Capital budgeting is Analysis of potential additions to fixed
assets Long term decisions; involving large expenditures Very important to a firm's future Define the
firm's strategic directions b. What is the difference between independent and mutually exclusive
projects? An independent project is one in which accepting or rejecting one project ... Show more
content on Helpwriting.net ...
| | | | | | | | | | | | | | | | | |Excel Financial Calculator

The North Sea Oil Company
Capital budgeting is one of the essentials in marketing decisions for many companies, and it
determines whether the invested projects are worth pursuing in the long run or not. Great sums of
money can be easily wasted if the investments turn out to be uneconomical and wrong. Therefore;
smart investing is very important for the companies that are looking for future growth and success in
the both domestic and global marketing. Successful investment projects benefit to the companies by
increasing in cash flow and decreasing its risks. North Sea Oil Company is one of the companies
that is looking for future increase in cash flow and decreasing its risks by smart investing into two
projects. Therefore, this portfolio project will address about the North Sea Oil Company's proposed
capital budgeting projects by using capital budgeting techniques to calculate and evaluate the
company's weighted average cost of capital, payback period, net present value, and internal rate of
return from the given case information because calculating the capital structure based on the
assumption the projects are implemented will give the investors either positive or negative signals.
Weighted Average Cost of Capital (WACC) There are two main sources that a firm can use to raise
capital are equity and debt. Weighted average cost of capital is the average of the costs of these two
sources of finance, and it gives each one the appropriate weighting. When a firm takes a new
project, it usually

Higher National Diploma
INTRODUCTION As we are aware, finance is the lifeblood of business or it can be said as the most
important part of all the business enterprises. To understand finance, you need to know the entire
business indeed. Finance can be used for various reasons like expanding the business, investing and
purchasing fixed assets like land and building, machinery so on. In order to survive in this
competitive world every organisation need to have a good strength of finance available to their
business or else they won't be able to survive in this world. Hence, it is very important to select the
correct sources of finance available to the company. Finance can be in two types' external sources or
internal sources. TASK ONE 1. SOURCES OF FINANCE ... Show more content on Helpwriting.net
...
This is a common method of financing a start–up. The founder provides all the share capital of the
company, retaining 100% control over the business. The advantages of investing in share capital are
covered in the section on business structure. The key point to note here is that the entrepreneur may
be using a variety of personal sources to invest in the shares. Once the investment has been made, it
is the company that owns the money provided. The shareholder obtains a return on this investment
through dividends (payments out of profits) and/or the value of the business when it is eventually
sold. A start–up company can also raise finance by selling shares to external investors – this is
covered further below. 1.2 External sources * Loan capital This can take several forms, but the most
common are a bank loan or bank overdraft. A bank loan provides a longer–term kind of finance for a
start–up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the
rate of interest and the timing and amount of repayments. The bank will usually require that the
start–up provide some security for the loan, although this security normally comes in the form of
personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in

Essay on Managing Financial Principles and Techniques
BTEC Level 7
Advanced Professional Diploma in Management Studies
Managing Financial Principles and Techniques
Prepared for:
McCain's Board of Directors
By
Arslan Irshad Dar
Tooting and Broadway consults
12 June 2010
Table of Contents
Introduction....................................................................................................1
Merits of accounting rate of return..............................................................................................1.1
Demerits of accounting rate of return.........................................................................................1.2
Merits of Payback ... Show more content on Helpwriting.net ...
McCain's investment in alternate energy and waste lagoon together will cost 150 millions with a
possible cost of capital 15% per annum. So, McCain therefore need to evaluate profitability,
feasibility and cost effectiveness of both project in long run.
We as financial consultants at Tooting Broadway consult presenting this formal report on the issues
raised by Finance Director to the Board of Director of McCain.
Investment Appraisal
Standard techniques of quantitative investment appraisal in business today are the payback time
method, the internal rate of return (IRR) and the Net Present Value (NPV), Accounting Rate of
Return (ARR) rule accompanied with a sensitivity analysis and often also scenarios. The central
argument is that the standard techniques fail to capture management's flexibility to adapt and revise
later decisions in response to market development. Below are the few merits and demerits of these
Investment appraisal techniques.
Merits of Accounting Rate of Return (ARR)
 It is very simple to understand and use.
 Rate of return may readily be calculated with the help of accounting data.

 They system gives due weight age to the profitability of the project if based on average rate of
Return. Projects having higher rate of Return will be accepted and are comparable with the returns
on similar investment derived

Revlon Inc. 2007 by M.Jill Austin
Capital Budgeting Techniques | |
GLOSSARY
Capital Budget: (1) The amount of money set aside for the purchase of fixed assets (e.g., equipment,
buildings, etc.). Also, (2) a request for authorization to purchase new fixed assets.
Mutually Exclusive Proposals: Consideration of two or more assets that perform the same function.
If one is chosen for purchase, the others are automatically rejected.
Profitability Index: A ratio of the present value of the benefits (PVB) to the present value of the
costs (PVC). The index is used instead of Net Present Value (i.e., PVB – PVC) when evaluating
mutually exclusive proposals that have different costs.
As the picture above illustrates, the capital budgeting decision may be thought of as a ... Show more
Here are our decision rules: If the NPV is: | Benefits vs. Costs | Should we expect to earn at least our
minimum rate of return? | Accept the investment? | Positive | Benefits > Costs | Yes, more than |
Accept | Zero | Benefits = Costs | Exactly equal to | Indifferent | Negative | Benefits < Costs | No,
less than | Reject |
Remember that we said above that the purpose of the capital budgeting analysis is to see if the
project 's benefits are large enough to repay the company for (1) the asset 's cost, (2) the cost of
financing the project, and (3) a rate of return that adequately compensates the company for the risk
found in the cash flow estimates.
Therefore, if the NPV is: * positive, the benefits are more than large enough to repay the company
for (1) the asset 's cost, (2) the cost of financing the project, and (3) a rate of return that adequately
compensates the company for the risk found in the cash flow estimates. * zero, the benefits are
barely enough to cover all three but you are at breakeven – no profit and no loss, and therefore you
would be indifferent about accepting the project. * negative, the benefits are not large enough to
cover all three, and therefore the project should be rejected.
3. Internal Rate of Return
The Internal Rate of Return (IRR) is the rate of return that an investor can expect to earn on the
investment. Technically, it

Irr V. Mirr Valuation Methods
Carrie Simmons
IRR v. MIRR Valuation Methods
Bus 650 Managerial Finance
Kristi Rayford
February 7, 2012
1.
Abstract The Internal Rate of Return (IRR) and Modified Internal Rate (MIRR) of Return are
imperative to understanding the investment on a project and the expected returns or profitability.
Under the valuation method of IRR is to accept the project which has the greater number of required
rate of return, or otherwise, reject the project. However, MIRR is better indicator of the project's true
profitability
IRR v. MIRR Valuation Methods
The Internal Rate of Return (IRR) is defined as the rate of return that would make the present value
of future cash flows plus the final market value of an ... Show more content on Helpwriting.net ...
Alternatively, if the payments are raised to, say $1,100, the IRR of that loan will rise to 5.2%.
(investopedia)
The formula for IRR, using this example, is as follows: 1. Where the initial payment (CF1) is
$200,000 (a positive inflow) 2. Subsequent cash flows (CF 2, CF 3, CF N) are negative $1050
(negative because it is being paid out) 3. Number of payments (N) is 30 years times 12 = 360
monthly payments 4. Initial Investment is $200,000 5. IRR is 4.8% divided by 12 (to equate to
monthly payments) = 0.400% | | Figure 1: The formula for calculating internal rate of return (IRR) |
(investopedia) )
Example of MIRR
MIRR value is always unique given that we have at least one negative and one positive net cash
flow. The modified internal rate of return is an average of the compounded future value of positive

cash flows over the discounted present value of negative cash flows. This is a compound example
below with positive cash flow at the reinvestment rate aka WACC or discount rate to find future
value, and we discount each negative cash flow at the finance rate to find the present value. We then
find the average of this ratio of net future value over the net present value to come up with MIRR
value and formula below:
Let us assume we set up an investment that requires an initial investment of $100,000 and we expect
to receive benefits and incur costs as $40,000 35,000 –20,000 40,000 38,000

Hearing: Internal Rate of Return and Terminal Value Essay
Harmonic Hearing
1) For both financing alternative, develop a model that shows forecasted revenues, expenses, profits,
and free cash flows generated by Harmonic in years one through seven.
–Model shown in chart below.
What is the terminal value of the company under each scenario?
As you can see in the graph below, the terminal value for the company if it takes the equity route is
about $106M, where if it takes the debt route its terminal value will be about $45M.
What cash payments will be made by the company at the end of year seven?
As you can see in the graph below, the only cash outflows from the company in year 7 will come
from debt financing, with about an $11M outflow from buying back the building from Frank
Thomas, ... Show more content on Helpwriting.net ...
After year 5, they cash flow will pick up where it left off and increase even higher until they sell the
company. The IRR will be around 429%. And the value created from the small investment will be
just under $45 million in only a 7 year period.
5) What are the positives and negatives of each proposal? Which financing alternative would you
recommend and why?
Equity Proposal
Advantages
i. Higher IRR ii. Can immediately complete launch of new hearing aid
 Will stay ahead of competition iii. Will reduce the risk of the transaction iv. Will reduce cost of
goods sold on new goods from purchasing new equipment
v. Will increase depreciation expense, lowering tax expenses vi. Will have no rent, interest, or lease
expenses vii. If company goes down, will not have to pay any additional money back
Disadvantages
i. Less ownership in company ii. Will have to invest more capital in the company than the debt
proposal
Debt Proposal
Advantages
i. Maintain 100% ownership of company
 Will not have to follow anyone else's plans for the business and can completely control the
direction the company moves in ii. More tax deductions
Disadvantages
i. Lower IRR ii. Will have a delay in bringing new hearing aid to the market

 Will allow competition to catch up to them faster iii. Will have to worry about having enough
cash flow to pay for several different interest payments and

Internal Rate of Return
Internal Rate of Return Meaning of Capital Budgeting  Capital budgeting can be defined as the
process of analyzing, evaluating, and deciding whether resources should be allocated to a project or
not.  Capital budgeting addresses the issue of strategic long–term investment decisions.  Process
of capital budgeting ensure optimal allocation of resources and helps management work towards the
goal of shareholder wealth maximization. Why Capital Budgeting is so Important?  Involve
massive investment of resources  Are not easily reversible  Have long–term implications for the
firm  Involve uncertainty and risk for the firm Capital Budget Techniques Net PresentValue
Discounted BenefitCost/Profitability ... Show more content on Helpwriting.net ...
In cases where one project has a higher initial investment than a second mutually exclusive project,
the first project may have a lower IRR (expected return), but a higher NPV (increase in
shareholders' wealth) and should thus be accepted over the second project. A method called marginal
IRR can be used to adapt the IRR methodology to this case.  Another problem with the IRR
method is that it may give different rates of return. Suppose there are two discount rates (two IRRs)
that make the present value equal to the initial investment. In this case, which rate should be used
for comparison with the cutoff rate? The purpose of this question is not to resolve the cases where
there are different IRRs.  Under IRR it is assumed that all the intermediate cash flows are
reinvested at the IRR which always not hold true. Which approach is better  Both NPV and IRR
methods yield better decision–making data based off them being sophisticated capital budgeting
techniques and consider time value of money and life time of the project.  NPV and IRR methods
yield better decision–making data based off them being sophisticated capital budgeting techniques
as NPV implicitly assumes that any intermediate cash inflows generated by an investment are
reinvested at the firm's cost of capital. 

Star Appliance Case Study Essay
Star Appliance Case Study
Situation:
Star Appliance is looking to expand their product line and is considering three different projects:
dishwashers, garbage disposals, and trash compactors. We want to determine which project would
be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the
most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re–
evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash
flows of each project and discounting them by the WACC to find the net present value, or by solving
for the internal rate of return, we should be able to see which projects Star should undertake.
Conclusion: ... Show more content on Helpwriting.net ...
The current year is 1979, so from Exhibit 3 the 1980 dividend is forecasted to be $1.70, and the
stock price in 1979 is $22.50. This gives a dividend yield of 7.56%, which is added to g. There are
four ways to solve for g:
• Dividend Growth Rate: Using the dividend schedule data in exhibit 6, g = 4.46%
• Capital Gains Yield: I was able to find the stock prices by multiplying the P/E ratio times EPS,
both of which are found in exhibit 6. g = 1.90%
• EPS Growth Rate: These values are also found in exhibit 6, leading to g = 5.55%
• Reinvestment Returns: I found "b" (the reinvestment rate) by using exhibit 1 to calculate the
percentage of net income per share of common stock that is paid out in dividends, and subtracting it
from 1 to solve for the percentage reinvested. The return on equity, "k", is found by dividing net
income (exhibit 1) by book value (exhibit 2). G = b*k shows g = 8.14%.
Now to find the return on equity (ROE), I chose to add the average of the Dividend Growth and the
Earnings Per Share Growth and use that as g. I decided that the Capital Gains Yield was much too
low compared to the other values of "g" that I found and should be discarded from further
calculations, considering it to be an outlier. The Reinvestment Returns yielded a value for "g" that is
a little on the high end, but it is only based on

Capital Budgeting
Capital Budgeting One of the most important decisions a financial manager can make involves
capital budgeting. Capital budgeting is used to determine which fixed assets should be purchased.
The purchasing of fixed assets is a form of a long–term investment. Allocating funds in the capital
account is a form of capital budgeting. A financial manager will determine if the purchase of a
capital asset or fixed asset is worth more over that assets life then it is for the cost to purchase it. In
other words, they make sure that the asset would get the amount it cost plus a profit in return.
Financial managers cannot seem to agree on a specific method that works better than the other when
it comes to estimating and budgeting. Even in the ... Show more content on Helpwriting.net ...
There is no guarantee that the future estimates will reflect the actual cash flows. Errors are a
common occurrence in forecasting, estimating and budgeting. The forecasting risk that there are
errors that will lead to misinformation, causing the wrong decisions to be made on a proposal. The
Payback Rule When talking about "payback," it is referring to the amount of time it takes to regain
the amount it cost a business to pay for the investment. In other words, how many years does it take
to generate enough cash flows from the investment to cover its costs. It can also be seen as the
amount of time it takes for an investment to "breakeven." The amount of time is a predetermined
amount, and that amount is what is factored in when determining if the investment is a good
investment. For example, if a company decides they want to invest in a capital asset that would take
less than five years to payback, and after calculating the cash flows and determine it will take only
three years to payback or generate enough from the investment, than the investment is a good
investment. There is no set rule when determining how much time an investment should have for the
payback. That is up to the discretion of the financial managers. One issue with the payback method
is that it ignores time value. When estimating the cash flows and the payback, it is good to project
over the entire allotted time span on what the cash flows would be.

Misis
Rainbow Products is considering the purchase of a paint–mixing machine to reduce labor costs.The
savings are expected to result in additional cash flows to Rainbow of $5,000 per year. Themachine
costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost ofcapital for
such an investment is 12%.[A] Compute the payback, net present value (NPV), and internal rate of
return (IRR) for this machine.Should Rainbow purchase it? Assume that all cash flows (except the
initial purchase) occur at the endof the year, and do not consider taxes. Rainbow Products is
considering the purchase of a paint–mixing machine to reduce labor costs.The savings are expected
to result in additional cash flows to Rainbow of $5,000 per ... Show more content on
Helpwriting.net ...
Themachine costs $35,000 and is expected to last for 15 years. Rainbow has determined that the cost
ofcapital for such an investment is 12%.[A] Compute the payback, net present value (NPV), and
internal rate of return (IRR) for this machine.Should Rainbow purchase it? Assume that all cash
flows (except the initial purchase) occur at the endof the year, and do not consider taxes. Rainbow
Products is considering the purchase of a paint–mixing machine to reduce labor costs.The savings
are expected to result in additional cash flows to Rainbow of $5,000 per year. Themachine costs
$35,000 and is expected to last for 15 years. Rainbow has determined that the cost ofcapital for such
an investment is 12%.[A] Compute the payback, net present value (NPV), and internal rate of return
(IRR) for this machine.Should Rainbow purchase it? Assume that all cash flows (except the initial
purchase) occur at the endof the year, and do not consider taxes. Rainbow Products is considering
the purchase of a paint–mixing machine to reduce labor costs.The savings are expected to result in
additional cash flows to Rainbow of $5,000 per year. Themachine costs $35,000 and is expected to
last for 15 years. Rainbow has determined that the cost ofcapital for such an investment is 12%.[A]
Compute the payback, net present value (NPV), and internal rate of return (IRR) for this
machine.Should Rainbow purchase it? Assume that all cash flows (except the initial

New Heritage Doll Company Write Up
Marina Chmykhalo–Friermood Professor N. Cohen FINA 6273–Section 10 October 23, 2014 New
Heritage Doll Company Write–up Introduction New Heritage Doll Company is a firm that has
ventured into doll production which has sought to extend its brand in order to broaden its market
framework and more importantly capitalize on high levels of customer loyalty. The vice president of
the Company, Emily Harris, is to forward her project proposal to the Budgeting Committee for
evaluation. The Vice–president's objective for proposing the project was based on potential to
strengthen the Company's division of production and drive future growth. Emily Harris has to
produce a compelling project to avoid the committee from declining the proposal. Basis of ... Show
more content on Helpwriting.net ...
However, the company is also limited to take this project due to several constrains including: low
production runs and volumes, limited gradation of customization increased manufacturing
complication; increase in production and development costs for the technology modification and
infrastructure. One of the key distinctions between the two projects is that Design Your Own Doll
and Match My Doll Clothing are two mutually exclusive projects. Their cash flows are related and
have the same function and they compete with each other meaning that the acceptance of one project
eliminates consideration of the other project. DCF and Sensitivity Analysis The Company should
maximize on cash management by capital rationing on the project accepted. NPV of the project
should be implemented as it reflects the time value of money invested in the accepted project.
Similarly this can be further elaborated by computation of IRR of both project proposal. The
analysis was performed by comparing the two projects using the same fixed terminal growth rate of
3% because both projects include a terminal growth rate element. For both projects, it would also be
beneficial to know how the terminal growth rate value is generated. Because the "medium"– risk
projects in the production division received a discount rate of 8.4% in 2010, this rate was used for
the Match My Doll Clothing line's DCF analysis. Design Your Own Doll project is long–term
project

Fin/370 Caledonia Products Essay examples
Caledonia Products Integrative Problem
FIN/370 Finance for Business
January 13, 2013 Caledonia Products Integrative Problem The following observation will describe
the decisions made by a financial analyst who is working for the capital budget department at
Caledonia Products. The organization has asked Team B to evaluate the potential risk involved in an
upcoming transaction and identify several options in how to proceed. Because this is the team's first
assignments dealing with risk analyzes the team has been ask to further explain the details. The
organization analysis will focus on free cash flows, projection of cash flows, projects initial outlay,
cash flow diagram, net present value, internal rate of return, and if the ... Show more content on
Helpwriting.net ...
Year–1:$2,100,000
Year–2:$3,600,000
Year–3:$4,200,000
Year–4:$2,400,000
Year–5:$1,560,000
Initial outlay
This project's initial outlay includes the necessary capital needed to purchase fixed assets and ensure
they are in operating order to start the project.
Cost of new plant and equipment: 7,900,000
Shipping and installation cost: 100,000
Initial working capital required to start the production: 100,000 8,100,000
The initial outlay for this project is $8,100,000
Cash flow diagram
$3,956,000 $8,416,000 $10,900,000 $8,548,000 $5,980,400
($8,100,000)
Net Present Value and Internal Rate of Return
Unit Price x units sold
1:$21,000
2:$36,000
3:$42,000

4:$24,000
5:$15,600
Therefore, NPV = $94,575.83
NPV Values for Years
1: $18,260.90
2: $27,221.17
3: $27,615.68
4: $13,722.40
5: $7,755.98
The Internal Rate of Return (IRR) = 12.61%
Project Conclusion Deciding on whether to follow through with a project is done by evaluating
either the internal rate of return or net present value. According to Investopedia, "All other things
being equal, using internal rate of return (IRR) and net present value (NPV) measurements to
evaluate

Discounted Cash Flow Techniques
ANALYSIS FOR FINANCIAL MANAGEMENT 10TH Edition Robert C. Higgins Additional
Problems Chapter 7 – Discounted Cash Flow Techniques page 247 A brief tutorial on Excel
financial functions (problems to follow) You may find the following Excel, built–in financial
functions helpful when analyzing the problems below. (To access these functions, select Insert,
Functions, and choose Financial.) =PV(rate, nper, pmt, fv, type) returns the present value of a series
of cash flows. =FV(rate, nper, pmt, pv, type) returns the future value of a series of cash flows.
=PMT(rate, nper, pv, fv, type) calculates the periodic payment for a loan based on constant
payments and a constant interest rate. ... Show more content on Helpwriting.net ...
He presents this as obvious proof of "gouging on the part of the money changers". Do you agree?
Why, why not? 5) In 1984, the city council of the town of Patterson agreed that their community
badly in need of a modern hotel that would cost approximately $25 million. To finance construction
members of the council organized the Patterson Hotel Corporation. Through strenuous promotion
they raised $15 million by selling 15,000 shares of stock at $1,000 per share. They secured the other
$10 million necessary to build the hotel as a loan provided by a local bank on a 10 year, 14 percent
mortgage that called for uniform annual payments sufficient to pay interest and to extinguish the
debt at the end of 10 years. Upon completion, the Patterson Hotel Corporation leased the hotel to a
national company that operated a chain of hotels. The lease ran for 30 years and contained a clause
permitting the lessee to purchase the hotel for $10 million at the end of the 30–year period. The
lessee agreed to furnish the hotel and pay all taxes (including income taxes) and operating expenses,
and was to meet the interest and repayment obligations on the mortgage during the first 10 years of
the lease. During the last 20 years of the lease, the operating company agreed to make payments
sufficient to permit annual dividends of $400 per share. No payments at all were to be made to the
stockholders during the first 10 years. This was the most favorable operating

Cash Flow Estimation And Capital Budgeting
Running Head: Cash Flow Estimation and Capital Budgeting
Trident University
Kenosha D. Coston
Module 3 SLP Assignment
Cash Flow Estimation and Capital Budgeting
FIN 501 Strategic Corporation Finance
Dr. William L. Anderson
5 June 2016
Introduction
The information below objectives is to offer an understanding of different capital budgeting
approaches. The development will contain calculations of the NPV along with other capital
budgeting approaches for example the regular payback period, discounted payback period, internal
rate of return (IRR), profitability index (PI) and modified internal rate of return (MIRR).? It at that
time evaluates whether the assignment ought to be accepted or rejected centered on the level for the
standards of the different approaches. Furthermore, it presents the motives why the development
would be accepted or rejected. The information finishes with a presentation of advantages and
disadvantages of each capital budgeting methodology in a table.
Computation of NPV
Solution:
Present value of Cash inflow = $2,000,000 / (1+0.125) ^1 + $3,500,000 / (1+0.125) ^ 2 +
$13,500,000 / (1+0.125) ^ 3 + $89,750,000 / (1+0.125) ^ 4 + $115,000,000 / (1+0.125) ^ 5 +
$120,000,000 / (1+0.125) ^ 6
Present value of Cash inflow = $1,777,777.778 + $2,765,432.099 +$9,481,481.481 +$56,030,483.16
+$63,816,830.09 +$59,192,422.11= $193,064,427
NPV = $193,064,427 ? $125,000,000= $68,064,427
Decision:
The NPV of the project is $68,064,427. This suggests that

Exam 3 Practice
t Finance 333 Practice Examination 3 1. Given the following information on S & G Inc. capital
structure, compute the company's weighted average cost of capital. Type of Percent of Before Tax
Capital Capital Structure Component Cost Bonds 40% 7.5% Preferred Stock 5% 11% Common
Stock (Internal Only) 55% 15% The company's marginal tax rate is 40%. a. 13.3% b. 7.1% c. 10.6%
d. 10% 2. In general, the most expensive source of capital is: a. preferred stock b. new common
stock c. debt d. retained earnings 3. Sonderson ... Show more content on Helpwriting.net ...
$4.8 million c. $8.2 million d. $12.0 million 13. The break–even quantity of output results in an
EBIT level: a. equal to the fixed costs b. equal to the contribution margin c. equal to zero d.
dependent upon the sales level 14. Financing a portion of a firm's assets with securities bearing a
fixed rate of return in hopes of increasing the return to stockholders refers to: a. business risk b.
financial leverage c. operating leverage d. all of the above 15. Optimal capital structure is: a. the
explicit cost of debt b. the implicit cost of debt c. the change in the cost of equity caused by the
issuance of the debt d. none of the above 16. A high degree of variability in a firm's earnings before
interest and taxes relates to: a. business risk b. financial risk c. financial leverage d. operating
leverage 17. The final approval of a dividend payment comes from: a. the controller b. the president
of the company c. the board of directors d. It is a joint decision requiring approval from all of the
above. 18. Fixed operating costs do not include: a. interest changes b. rent c. depreciation d. all of
the above Use the following information to answer the next 3 questions: The initial outlay for
Project A is $10,000. The firm's required rate of return for

Millegan Creek Apartments- Financial Analysis Essay
The Millegan Creek Apartment case is an example of a commercial loan. The parties involved in the
commercial loan are JP Multifamily Inc. and Fleet Bank. Real Estate group at Fleet Bank want to
find out whether or not to accept JPI's proposed $15,715,000 loan for a 390–unit apartment project
in Austin, Texas. The details about the each party, market and financial analysis of the project is
outlined below. THE BORROWER –JP MULTIFAMILY INC. The Development Expertise JPI
Multifamily Inc.(JPI) was founded in 1989 by John Carpenter and Frank Miller, who had worked
together at Southland Financial. JPI, a first class developer, was known as a "merchant builder"
meaning that they developed properties with the intention of selling rather than ... Show more
Total Project Cost: $19,644,000 Loan Amount: $15,715,000 Land Cost: $1,425,000 The holding
period: Target holding period is two to three years MARKET ANALYSIS Regional Economic
Drivers Austin housing market holds a comparative advantage and this advantage exists because; –
it's ranked sixth in the nation as a preferred location for a new manufacturing facility, – Austin
economy had always been universities and government as the state capital. Austin had a government
workforce of over 110,000 including state, country and city employees and plus recently added
3,000 government sector jobs, –The location of project was close to many of Austin's high tech
companies. Texas Instruments had a big campus located across the street. Others in the area
included: Abbott Laboratories, Tandem Computers, 3M, and State Farm Insurance. Apple
Computers had also announced plans to build a new, $28 million, 300,000square foot facility to
house its U.S. Customer support Service – The other strength of Austin is that the city is filled with
good universities. Companies were attractive to Austin economy by the presence of university –
based research and its very desirable climate. Market demand Austin had experienced significant
population growth and local economists expected these trends to continue. The average family size
would continue to be about 2.43 people per household. Job Growth Since the

Company 's Potential Expansion Into The 16 Ounce Bottling...
After careful analysis concerning the company's potential expansion into the 16–ounce bottling
machine, the attached spreadsheet and discussion below highlight three distinct scenarios that
produce both unprofitable and profitable outcomes. Provided in the order of a realistic, pessimistic,
and optimistic projections for earnings, a technique known as scenario analysis was implemented.
Each scenario's overall level of profit (net present value, NPV) was calculated and then compared to
our internal risk level, which is based on our current capital structure (Ross, Westerfield, Jaffe, &
Jordan, 2014). Additionally, break–even analysis was estimated in an attempt to calculate the point
of sales in which the profits match the overall cost of the machine (Ross et al., 2014). Therefore, the
ensuing paragraphs first highlight key company–specific and project variables, followed by
forecasted predictions that will play an important role in the decision–making process.
It is important to first note that since NPV is the preferred choice of examining a project here at
BBI, we can agree that accepting a project that generates a positive NPV will benefit stockholders
(greater return) as well as increase the overall value of the firm (Ross et al., 2014). Additionally, it is
also essential to supplement our findings by computing our internal rate of return (IRR), which
produces the return of a project without any external factors included (Ross et al., 2014). However,
the determining

Net Present Value: The Advantages Of Net Present Value
Net Present Value (NPV) is the difference between the present value of cash inflows and the present
value of cash outflows. NPV is used in capital investment to break down the profitability of a
projected investment or project.
The following is the formula for calculating NPV :
A positive Net Present Value point that the projected earnings generated by a project or investment
(in present dollars) exceed the anticipated costs (also in present dollars). Normally, a profitable
investment has a positive NPV and negative NPV will result in net loss.
Decision rule – When there is a mutually exclusive project is to choose one with highest NPV
(Acowtancy, 2015). The higher the positive NPV, the more attractive the project (Thompson, August
2015). ... Show more content on Helpwriting.net ...
NPV also takes into account of time value of money and also based on cash flows, which are less
subjective than profits (Keong, 2015). Another benefits of NPV is that it is based on real cash flows
and considers the whole life of the project (Acowtancy, 2015).
Disadvantages – It involves a lot of calculation which may be difficult for some managers. The
discount rate and inflation rate is constant during calculation where in actual, it may change due to
economical factors.
Accounting rate of return (ARR)
Average rate of return also called as the Accounting rate of return, or ARR is a financial ratio used in
capital investment. ARR calculates the return, created from net income of the proposed capital
investment. ARR will be in the form of percentage return. The following is the formula for
calculating ARR: Decision rule – The project is acceptable when the ARR is equal to or greater than
the desired rate of return. When comparing investments, people will look to the higher ARR,
because the higher the ARR, the more attractive the investment.
Benefits – ARR can be calculated and understand easily. Most managers and accountants uses ARR
because it is expressed in percentage terms that they are familiar

Sap for Atlam
CASE 6 : SAP FOR ATLAM
BACKGROUND OF THE COMPANY
Company Name : Akademi Teknikal Laut Malaysia (ATLAM)
Principal Activities : Education & Training
Commenced Operation : 15th August 1981
Number of Employees :Approximately 200 employees
Office : Melaka & Terengganu
Main Problem : Asked to upgrade its accounting system with the PETRA group–wide SAP system
which takes up a very high initial investment compared to ACCPA
Introduction on SAP
SAP is an Enterprise Resources Planning (ERP) and stands for Systems, Applications and Products
in data processing. It is a system that handles almost all departments in an organization. SAP has
several modules as illustrated below.
ISSUES/CHALLENGES AND SOLUTION 1. Upgrading ... Show more content on Helpwriting.net
...
Furthermore, in the long run, more cash flow is expected as well.
C. Payback Period
Payback period is a method that estimates the amount of time required for the cash flows generated
by the investment to repay the cost of the investment. This analysis provides insight into

Case02 Piedmont
1. How will discount rates of 8, 10, 12, 14, and 16 percent affect the project's feasibility?
Figures 6 – 10 provide suggested answers for this question. The answers for this question assume a
useful life of 5 years. Using a discount rate of 8 percent, the net present value of all benefits is
$1,732,836.16; the net present value of all costs is $1,640,384.79; the overall net present value is
$92,451.36, and the project breaks even in approximately 3.84 years.
Using a 10 percent discount rate, the net present value of all benefits is $1,645,201.46; the net
present value of all costs is $1,576,173.19; the overall net present value is $69,028.27, and the
project breaks even in approximately 4.04 years.
Using a 12 percent discount rate, ... Show more content on Helpwriting.net ...
Hopefully, your students will suggest that additional factors should be considered. These factors
include scheduling, strategic alignment, operational objectives, government regulations, and
potential benefits. If we base our decision solely on the information from the table, it appears that
the custom order tracking system has the second highest IRR. (See Figure 13 for the IRR value.)
he answer.
Test Your Design Solutions
The Test Your Design section requires students to modify their worksheet design and then use the
modified worksheet to provide Ms. Pablo with answers. Suggested answers for the Test Your Design
questions are provided below.
1. What recommendations would you make if the useful life of the project is three years instead of
five years? Six years? (Use the original case values and assume a discount rate of 14 percent.)
Figure 14 shows the modified Economic Feasibility Summary worksheet. Using a 14 percent
discount rate, it appears that the project breaks even in approximately 4.54 years. At first glance, the
students may recommend that the project is not feasible, if its useful life is only three years. As the
project is in its planning phase, the project team has not identified all benefits and costs. Arguably,
this project is still viable, especially if the team emphasizes the custom order tracking system's
intangible benefits, such as customer service and employee morale.

In terms of six years, the net present value of all benefits is

Financial Validation : Evaluation And Selection Of...
6.6 Financial Validation
What is it?
Financial Validation, as it pertains to Project Management, is the process of evaluating projects to
determine their suitability for investment measured by their quantifiable benefits and return on
investment (ROI). This process typically occurs in one step of the project governance process
following project idea generation, but may also be an iterative process that occurs over the project's
lifecycle. The iterative approach is usually done to monitor the results of the project during the
execution phase and compare them to the project plan in order to determine if the project is meeting
its desired specifications. Regardless of the method chosen, financial validation is used to ensure the
financial impact and effectiveness of the proposed project.
What does it look like? Evaluation and selection of proposals Approval and control of capital
expenditures Post–completion audit of investment projects
How to use it?
6.6.1 Evaluation and Selection of Proposals
Once the idea generation phase is complete and the investment proposal has been generated, it is
time to evaluate the proposals and select the best option based on their suitability for investment.
There are five different methods of project evaluation, which include net present value (NPV),
internal rate of return (IRR), benefit–cost ratio (profitability index), accounting rate of return (ARR),
and payback period.
Net Present Value
Net present value is one of two discounted cash flow

Case
| Amstelveen Corporation |
Memo
To: Ford Allen
From: Katie
Date: [ 2/22/2012 ]
Re: Recommendation for Amstelveen Corporation's project investment
The purpose of this memo is to explain and recommend which projects Amstelveen Corporation
should invest in based on capital budgeting calculations. First, I will explain if there are any
contradictory recommendations and then I will give the recommended total I suggest Amstelveen to
raise. I will also give my recommendation on which project(s) the company should pursue if it
remains limited to €8,000.000.
Recommendation of Inadvisable Investments
I began my process of identifying which projects would be inadvisable to pursue based on company
policies by first calculation the net ... Show more content on Helpwriting.net ...
Another project that I would not recommend is Project D. Even though this project has an
acceptable net present value, accounting rate of return, and payback period the internal rate of return
of 3% is not acceptable. The internal rate of return is a larger determining factor than the other
figures.
Recommendation of Advisable Investments
Based on Amstelveen Corporations' policies and capital budget figures, I recommend that the
corporation to invest in Projects A, B, C, and E. Project A has a very high internal rate of return and
accounting rate of return. This indicates this project will be highly profitable and a positive net
present value will increase the value of the corporation. The payback period of 1.5 years also falls
within the 2 year cut–off stated in the policy. Both Projects B and E have acceptable internal rate of
returns and accounting rate of returns as well. This indicates profitability for the company. Since the
net present value for these projects are positive, they have positive cash flows and much value in the
corporation.
Project C is another project I recommend to invest in although the payback period of over the cut–
off by six months. However, this project has a highly acceptable internal rate of return and
accounting rate of return. The net present value is large, which would add a lot of value to the
company. In my opinion, these three other factors are large enough to outweigh the payback

Essay about Laurentian Bakeries
Question 1: Explain the theoretical rationale for the NPV approach to investment appraisal and
compare the strengths and weaknesses of the NPV approach to two other commonly used
approaches. (30 marks)
This first section of this paper will provide a brief explanation on theoretical rationale for the net
present value (NPV) method of investment appraisal and then compare its strengths and weaknesses
to two alternative methods of investment appraisal, those of internal rate of return (IRR) and pay–
back.
Theoretical rationale for the NPV approach
The net present value rule or NPV devised by Hirshleifer (1958), is the fundamental model of how
firms decide whether to invest in a project, commonly known as the 'investment decision', or ...
Show more content on Helpwriting.net ...
G is also happy to invest because they can borrow against the future payoff of the investment. By
investing G gets £20,000 more to spend today (£200,000 less £180,000). It would pay for either
investor to borrow to invest in the opportunity due to the returns on offer.
Despite the reality of known imperfections in capital markets (e.g. taxation, transaction costs,
asymmetric information), overall the use of NPV makes sense as a corporate objective. Certain
'imperfections' can be modelled into financials, providing a more realistic picture. Brealey et al
(2008) state that the use of NPV for uncertain cash flows makes sense too, providing there is free
access to competitive capital markets. This is due to when affirm chooses only positive–NPV
projects, they will be meeting the shareholders and firms objective of maximising wealth. Instead of
solely seeking a maximisation of wealth that might negatively impact in other areas (e.g. future
profits, return on investment etc), NPV accounts for the time value of money, opportunity cost of
capital and differences in project rates of return.
Comparison of the strengths and weaknesses of the NPV approach to two other commonly used
approaches
This report will now focus on comparing the strengths and weaknesses of the NPV approach to two
other investment appraisal approaches, internal rate of return (IRR) and pay–back.
Net present value (NPV)

The NPV approach asks

Business 650 Managerial Finance: The Modified Internal...
MIRR VS. IRR
Charles Beale
Ashford University
Business 650 Managerial Finance
Professor Rick Kwan
September 17, 2012
The Modified Internal Rate of Return is an underused measure for selection of projects that a
company can choose because it is more effective at dealing effectively with periodic free cash flows
that develop from the time that an asset is purchased through its life to the point where it is sold,
ranking projects and variable rates of return through the project life. The Internal Rate of Return is
an inefficient model to make decisions with because it lack the ability to account for the periodic
free cash flows, proper ranking and variable returns from certain projects.
The use of Internal ... Show more content on Helpwriting.net ...
Choosing the hardware and software to improve efficiencies that has an initial cash out flow for the
hardware and yearly subscription fees for the software, cash inflows from the deployment and re–
allocation of human assets to revenue generating positions, reductions in costs, improving patient
flow to allow for more patient visits per day involve multiple cash flows and would be difficult to
analyze with the Internal Rate of Return. This is often complicated with the scale of the deployment.
The hospital system may decide that it wants to deploy 150 units. The scale of this program can be
in the millions of dollars and costs savings and the reallocation of employees to revenue producing
positions can far exceed the cost of the technology over a significant period of time. This case it can
be seen that the using the Internal Rate of Return with the potential for multiple additional cash
flows can be difficult. If there were no salvage or trade in value to the purpose built hardware
systems and those systems had to be disposed of in an environmentally friendly way with a negative
cash flow. This produces the problem of multiple rates of rates of return. This is similar to many
examples of strip mines where there is a cash outflow at start up, cash inflows during the project and
then cash outflow to return the land to pristine condition. The internal rate of return on these cases
tends to produce astonishingly high or astonishingly negative

Study Guide
1. When a firm maximizes profits it will simultaneously minimize opportunity costs. Answer: True
Terms to Learn: opportunity cost
2. The usual starting point in budgeting is to forecast net income. Answer: False Terms to Learn:
operating budget The usual starting point in budgeting is to forecast sales demand and revenues.
3. If the $17,000 spent to purchase inventory could be invested and earn interest of $1,000, then the
opportunity cost of holding inventory is $17,000. Answer: False Terms to Learn: opportunity cost
The opportunity cost of holding inventory is $1,000.
4. The revenues budget should be based on the production budget. Answer: False Terms to Learn: ...
Answer: True Terms to Learn: relevant costs
19. When replacing an old machine with a new machine, the book value of the old machine is a
relevant cost. Answer: False Terms to Learn: relevant costs The original price of the old machine is a
past cost and therefore an irrelevant cost.
20. A four–quarter rolling budget encourages management to be thinking about the next 12 months.
Answer: True Terms to Learn: rolling budget
21. Since fixed manufacturing overhead is fixed, it is not normally included in the operating budget.
Answer: False Terms to Learn: operating budget Fixed manufacturing is normally included in the
operating budget.
22. The manufacturing labor budget depends on wage rates, production methods, and hiring plans.
Answer: True Terms to Learn: operating budget
23. Variances between actual and budgeted amounts inform management about performance relative
to the budget. Answer: True Terms to Learn: responsibility accounting
24. Discounted cash flow methods measure all the expected future cash inflows and outflows of a
project as if they occurred at equal intervals over the life of the project. Answer: False Terms to
Learn: discounted cash flow (DCF) methods As if they occurred at a single point in time.

25. Discounted cash flow methods focus on operating income. Answer: False Terms to Learn:
discounted cash flow

Sun View Valley Corporation ( Svvc )
School of Business & Economics
Master of Business Administration
BUSN–6020 – Corporate Finance (Winter 2015) Case Study Assignment 2: Sun View Valley
Corporation (SVVC)
Prepared for:
Dr. Raymond Cox
Contents
Executive Summary 2
Question 1 – Methods Used 3
Payback Method 3
Discounted Payback 3
ARR Method (AAR, ROI) 4
Profitability Index (PI) or Benefit / Cost Ratio 4
Internal Rate of Return (IRR) 5
Modified Internal Rate of Return (MIRR) 5
Equivalent Annual Annuity 5
Question 2 – Sensitivity Analysis 6 o Selling Price 7 o Variable Cost 7 o Fixed Cost 7 o Investment
Cost 7 o Net Working Capital 7 o Discount Rate 7
Question 3 – If the abandonment value is $9 million 8
Question 4 – Should SVVC make this investment? 8 ... Show more content on Helpwriting.net ...
It is our recommendation that SVVC should execute on the investment in the Venus Vinos Project.
To further support the decision to move forward on the project we conducted a sensitivity analysis
which shows the projected estimates are heavily reliant on selling price and net working capital
remaining unchanged.
Our attempts to mitigate forecasting risk have been significantly lessened because of the number
discounted cash flow methods we have employed in our analysis. The scope of the project does not
take into consideration technological improvements or human resource associated risk. There are
also no external economic considerations made for the purposes of this project. SVVC is
considering the VVP solely as a mutually exclusive option with no other alternatives. No capital
rationing has been considered in this project and this project has been analyzed with the Stand Alone
Principle in mind.
Question 1 – Methods Used to evaluate the investment using the payback, discounted payback,

ARR, NPV, PI, IRR, MIRR and equivalent annual annuity methods.
When we evaluate the project using all the methods as outlined below, the picture for SVVC
potential investment in VVP becomes clearer. By using multiple methods for the project, we are
assessing the project from many financial perspectives to mitigate the potential for error related to
application of just one DCF. The differences in

Capital Planning And Budgeting For The Future Of An...
Capital Planning & Budgeting
Brent Ours
American Intercontinental University
Unit 1 Individual Project
FINA320–1503–01
Jeffrey Hardin
7–26–2015
Abstract
Capital Planning refers to the process of budgeting resources for the future of an organization 's long
term plans. Capital planning includes budgeting for new or replacement machinery, research and
development of new products, new plants and other major capital expenditures. Based on provided
variables the Net Present Value (NPV) and Payback Periods will be calculated. A capital budget will
be present whereas decisions can be made whether to accept or reject these projects. Projections will
be made based on four–year time frame.
Capital Planning & Budgeting
The director of ... Show more content on Helpwriting.net ...
Using the figures provided calculations fro Pay Back Period, Net Present Value, Internal Rate of
Return and Modified Rate of return will be determined. Additionally, the risks associated with the
projects will be addressed.
Capital Budgeting
Capital Budgeting is the process of identifying, analyzing, and selecting investment projects whose
returns (cash flows) are expected to extend beyond one year. Capital Budgeting techniques is a tool
aiding in analyzing and assessing the projects from diverse perspectives such as projecting the
financial outcome or inpact of accepting the project. Capital Budgeting is the use of existing capital
for the purpose of increasing the long term returns of the concern. Capital budgeting
reimbursements accrue in future therefore reservation accompanys every undertaking.
FINA320 Unit 1 IP.xlsx
Pay Back Period Payback period can be defined as the anticipated number of years needed to
recuperate an original investment. Payback indicates number of years an invesment takess to return
the actual cash outflows or investment.
Pay Back Period = Initial Investment / Annual Cash Inflows
When deciding whether to accept or reject a project: accecpt when the payback period is below the
maximum payback period set by the organization. With numerous projects, importance is given to

the project with the lowest payback period.
Net Present Value
The Net Present Value (NPV) is the difference between the

Diamond Chemicals
Diamond Chemicals PLC Executive Summary
Diamond Chemicals is considering two mutually exclusive projects, the Merseyside project and the
Rotterdam project, for the production of polypropylene
When considering the Merseyside project, senior–management wants a positive impact on earnings
per share. The addition to earnings per share was £28,800 with an average addition of £2,000 per
year2. Calculated with erosion, the addition to earnings per 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 ... Show more content on
Helpwriting.net ...
Refurbishing the polymerization tank to achieve higher pressures and thus greater throughput.
Renovating the compounding plant to increase extrusion throughput and obtain energy savings.
Bruner: Case Studies in Finance
The project would have an initial outlay of £9 million and will require the entire line to be shut
down for 45 days. This project would lower energy requirements and have a 7% greater
manufacturing throughput. Also, it is expected to improve its growth margin to 12.5%.
Bruner: Case Studies in Finance
Concerns at Merseyside:
There are also some concerns that have been brought to our attention from different divisions of
Diamond Chemicals. They include:
Concerns of the Transport Division:
Concerns coming from the Transport Division were those of the increased capacity that they would
receive as a result of the Merseyside project. This project would increase the allocation of tank cars
to Merseyside. To realize this expansion, the Transport Division would need to purchase a new
rolling stock. This purchase would cost £2.0 million. As stated earlier, Greystock has left this
portion out of his Discounted Cash Flow analysis, stating that

Problems Between of Internal Rate of Return and Modified...
This research paper discusses the problems that exist between IRR and MIRR methods and proves
that the MIRR is the better method to choose from. The MIRR method is very useful because it can
aid an individual when it comes to investing and capital budgeting. One important advantage that
the MIRR method has over the IRR method is that it provides a more effective analysis of capital
budgeting. The MIRR method is highly recommended for projects in which cash flow is constantly
changing or when the project is mutually exclusive. A scenario in which the MIRR method should
not be utilized is when one is attempting to make decisions concerning investment over individual
projects. Internal Rate of Return IRR is considered to be an important method for capital budgeting
proposals. The Internal Rate of Return is the rate, where present value of cash inflows and outflows
comes out to be equal or the rate at which NPV from the project comes equal to zero. At this rate,
there are no benefits or losses for the Organization. If the Organization earns an IRR on the
investment, the NPV will be equal to zero for the investment. It also helps the Management to take a
decision regarding investment as to whether they should invest in project or not. A higher IRR
makes the project desirable to be undertaken. It provides information about the efficiency of the
project because it is based on the assumption that all the cash inflows are invested again in the
project at the IRR basis (Brigham &

Capital Expenditure Valuation Methods
Capital Expenditure Valuation Methods The payback period is the time it takes for a project or
investments cash outflows to be recovered by cash inflows generated from the same project or
investment. It is a very simple and commonly used capital budgeting technique. The formula used to
compute the payback period is initial investment divided by cash inflow per period. You generally
want to choose the investment that provides the shortest payback period, because you will get you
cash back and it can be put toward other investments or projects. The longer the payback period the
riskier it is. Top management will normally have a target payback period. They should select the
project that offers a payback period less than the target. There ... Show more content on
Helpwriting.net ...
The project with the highest value should be accepted. Although, the internal rate of return method
is quite accurate, it does have some disadvantages. When uneven cash flows are involved, the
interactive process is inconvenient and time consuming. Also, if there are fractional interest rates
and a present value table doesn't account for this then the internal rate of return will be difficult to
determine. In some instances, certain projects may have several rates of return that will make the net
present value of cash flows to equal zero. The modified internal rate of return is also the discount
rate at which the net present value of an investment equal zero, but it is an improved version of the
internal rate of return as it does not require the assumption that project cash flows are reinvested as
the internal rate of return but it determines a reinvestment rate. If the modified internal rate of return
is greater than the project's hurdle rate, which is the rate of return specified as the lowest acceptable
return on investment, then the project should be accepted. If choosing between several projects, the
one with the highest rate would be the best option. The advantage of the modified internal rate of
return is that it solves some of the problems associated with the regular internal rate of return. The
modified rate of return considers that funds reinvested are going

Finance
An organization's valuation can create very efficient planning and capital distribution making this an
important step in the organization's valuation. The short and long term investments of an
organization affect the day to day decisions of management and it also affects the organization's
value. Because this affects the value of the organization it becomes extremely important to use
appropriate and precise valuation methods in order to estimate business activities and or projects
that can affect the value. Using valuation methods such as Internal Rate of Return or the Modified
Internal Rate of Return can eliminate improper decisions and the organization will be able to
manage their assets and capital in a successful manner and meet the ... Show more content on
Helpwriting.net ...
Even though the figures may be different management usually choose the projects with the highest
internal rate of return because the estimates are high. The discounted rate is the measure of the
internal rate of return when the net present value is at zero.
The net present value is also used as a method of valuation and helps determine the internal rate of
return. This is a very important set in deciding on a project because if the estimated calculations are
not done properly this can lead to a bad business decision and it can lead to a smaller profit or even
a loss on the project.
The internal rate of return assumes that the project/investment has initial cash outflow for the future.
This is not always true because there may be expenses that are not redirected in the initial cash
outflow.
In the net present value formula, if the income amounts (Ct) received in each period is higher than
the expected amount then a higher internal rate of return must be known to reset the net present
value at zero. The internal rate of return shows positive figures that management uses to select
projects. However, because there is an estimate it can cause the budgeting to have mistakes because
of the reinvestment figures. For example if there are two projects that have internal rate of returns
that are the same at 15%, have the same figures for the cash flow, risks, and the allotted time

Different Aspects Of An Investment
Abstract
This paper explores and analyzes the different aspects of an investment in a company. Two different
corporations were analyzed and a decision was made regarding which corporation would be given
an investment. The acquisition of two corporations was not allowed, as there was a spending limit
among the two. I made substantial analysis for the two corporations, as this is very significant for
possible growth of our own company. I analyzed a five–year projected income statement and a five–
year projected cash flow. I also determined the Net Present Value, and Internal Rate of Return
among the two companies to make a decision. This paper also includes three peer–reviewed sources
to combine with the theoretical explanations.
Introduction
The thought of acquiring another corporation has come up among our own, and there are two
possible opportunities. Each has a cost of $250,000, and we are not allowed to exceed that cost. The
first possible company is Corporation A, which includes revenues of $100,000 in year one, growing
by 10% per year. It includes expenses of $20,000 in year one, growing by 15% per year. It also
includes depreciation expense of $5,000 each year, a tax rate of 25%, and a discount rate of 10%.
The second possible company is Corporation B, which includes revenues of $150,000 in year one,
growing by 8% each year. It also includes expenses of $60,000 per year, growing by 10% each year.
Lastly, it includes depreciation expense of $10,000 per year, a tax

Introducing The Internal Rate Of Return
INTRODUCING THE INTERNAL RATE OF RETURN (IRR)
The Internal Rate of Return (IRR) is that discount rate providing a net value of zero for a future
series of cash flows. The IRR and Net Present Value (NPV) are used to decide between investments
to select what investment should provide the most returns. DIFFERENCE BETWEEN THE NPV
AND IRR
The main difference is that the Net Present Value or Net Present Value (NPV) is used as actual
amounts, while the IRR is the interest yield as a percentage expected from an investment.
When using the IRR, one generally selects the projects whose IRR is greater than the cost of capital.
However, selecting the Internal Rate of Return as opposed to the Net Present Value means that if
investors focus on maximizing IRR instead of NPV, there is a risk in picking a company with a
return on investment bigger than the Weighted Average Cost of Capital (WACC) but less than the
present return on existing assets.
IRR represent the actual annual return investment only when the project generates 0 interim cash
flows – or if those investments can be invested at the current IRR.
So the goal should not be to maximize the Net Present Value (NPV).
However, this article aims to present the limitations and benefits of using the Internal Rate of Return
(IRR).
Net Present Value (NPV)
The net present value of a project depends very closely the discount rate used. So when it comes
time to compare two projects, the choice of discount rate, which is often based on

Guillermo Furniture Capital Budget Recommendation Essay...
Guillermo Furniture Capital Budget Recommendation
ACC/543
Professor Deborah Fitzgerald–Thomas
University of Phoenix
November 08, 2010
Abstract Recent changes in the business environments and economy have prompted Guillermo to
find different options to invest and stay in business. As a new hire accountant for employer
Guillermo Furniture, I have analyzed and differentiate capital budge techniques and recommended
best suited course of action.
Capital Budget Recommendation Guillermo Navallez is a handcrafted midgrade and high–end sofas
manufacturer, and owns of Guillermo Furniture Company. As a newly hired accountant in this
company, I have been asked to differentiate among the various capital budget evaluations ... Show
more content on Helpwriting.net ...
The internal rate of return uses the present value concepts as well as establishing the interest yield of
proposed capital budget inflows is the equivalent of the investment project that has a net present
value of zero and the present value of net cash The payback method and the unadjusted rate of
return are methods that overlook the time value of money but are quick and easy to calculate but
prove to be less accurate. These types of methods are typically used for small investment. The
payback method itself shows how long it will take the company to recover the initial investment
cost. When using the payback method, it is recommended to apply for a shorter payback period. The
formula for computing the payback period is as follows: Payback period = Net cost of investment ÷
Annual net cash inflow Another technique for capital budgeting that doesn't compute discounted
cash flow is the unadjusted rate of return method or the simple rate of return. Investment cash flows
are not adjusted to show the time value of money. This method is also called simple rate of return
and computed as follows:
Unadjusted rate of return = Average incremental increase in annual net Income ÷ Net cost of original
investment
Explanation of capital budget techniques The difference between present value of cash flows and the
cost

Capital Budget Recommendation
Capital Budget Recommendation
ACC/543
Capital Budget Recommendation As a dedicated furniture maker and businessman, a clear
understanding of the techniques used to assist in capital budgeting is important. There are several
techniques used, each having advantages and disadvantages. Within this recommendation, the
advantages and disadvantages of each technique will be briefly discussed. Additionally, discuss how
each technique will assist in determining the desirable capital budget technique to recommend.
Concluding with a course of action Mr. Navallez should take, along with calculation to support the
recommended course of action.
Capital budget techniques Several techniques can be used to analyze an opportunity to invest in ...
This technique assist in the decision making process because once the internal rate of return is
determined, the desired investment can easily be decided. Taking the cash outflow and inflow from
each alternative and the desired rate of return will offer the best comparison as which investment
will present a return favorable.
Recommendation
The recommendation Mr. Navallez should take is alternative 1. Alternative 1 offers the best return
on investment. The use of the net present value techniques presents the desired return on investment.
Net present value over internal rate of return presents the expected return on cash outflows for the
cost of the investment, thus allowing management to "compute a present value index." (Edmonds,
Edmonds, Olds, McNair, & Schnieder, p.1160) Assume the desired rate of return is 8% over 10
periods, alternative 1 cash inflow would be $421,834 with cash outflow being $323,091 and
alternative 2 cash inflow of $314,057 with cash outflow being $283,930. The present value of
alternative 1 is $98,743 and alternative 2 is $30,127. Alternative 1 yields a higher rate of return,
however, taking it a step further to confirm alternative 1 is the best investment the present value
index offers an additional comparison of the two investments.

ACCT614-1403A-02 Applied Managerial Accounting
ACCT 614 – 1403 A – 02
IP 3
Colorado Technical University
David Christian
08/04/2014
To: EEC President
Company Memo This memo has been constructed for the purpose of reporting information the
president of the company in reflection the purchasing of a supplier in the near future. It reflects
information concerning Calculate Net Present (NPV), Internal Rate of Return (IRR), along with the
payback of the investment opportunity. In this company memo the following information will be
discussed:
$500,000 savings per year for the next 10 years.
EEC's cost of capital/14%.
EEC's purchase of the supplying company for $ 2 million.
The focus of EEC's investment of the purchasing of the supplier is to cut down on ... Show more
EEC calculated the amount of time involved the anticipation of its cost ($3 million). The timeline in
recovering their cost of investment ($2 million) initially for the foundation of this investment any
profit made in the future of this investment will be justified as a profit for the company. If EEC can
anticipate a fast return on its investment it is a profitable wise decision in making the investment
financial, it is considered to be an easier way of formulating investments financially. On the basis of
one year all cash flows is added together equal to the sum of $2 million originally invested, then it is
divided by the annual cash flow of $500,000. The calculation of the payback period would equal
four years. After this time frame any financial proceeds will be considered profitable for the
company. I conclude that the timeframe is adequate in comparison of the investment in this
worthwhile investment financial venture for the company.
Changes/Investment Opportunity Now we want to examine the analysis business report concerning
the cost of capital that has been increased at 28% in accordance with the Net Present Value which is
$500,000 the question being would still be worth it to make the investment to the company
(Needles, 2010). While at the same time the internal rate of return is still at 21% which is lower than
the 25% in the expenditures. In reflection of these calculations the investment would not

Budgeting
Budgeting Model Case Paper
February 24, 2014
When incorporating whether to purchase Corporation A or Corporation B, it was easy to choose
Corporation B. The reason behind this decision is based on a multitude of things. The income
statements are close to one another, and even though the statement is slightly greater in Corporation
A than B, that is not the main reason for the decision. The income statement is very similar to a
company's cash flow. With the income statement being marginally greater with company A the cash
flow of company B is much greater. Unlike the difference of just under $200 with the net income,
the cash flow is greater by more than $3,500 between the two corporations. Cash flow can be
defined as "A ... Show more content on Helpwriting.net ...
As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all
other factors are equal among the various projects, the project with the highest IRR would probably
be considered the best and undertaken first ("Internal Rate Of Return – Irr", 2014)." When looking
at both companies discount rates, they are within 1% of one another. The higher the discount rates
the better the profit for that particular company. Corporation A has a discount rate of 10%, while
Corporation B has a discount rate of 11%. Generally speaking, the higher the discount rate the more
profitable that company will become. The similarities between net profit revenue, and internal rate
of return is how well they work with one another. Even though both companies have a starting sale
of $250,000, they have many differences between them. The NPV and IRR work well with one
another in providing the proper information needed in determining whether to buy or pass on a
particular business. Both companies are profitable, but as explained earlier, the higher the net profit
revenue along with the higher discount rate is a no brainer in the decision process to purchase
Corporation B. Net profit revenue uses the rate to help find the internal rate of return. Using the
$250,000 as a starting point in both calculations of net profit revenue and internal rate of return

Capital Budgeting Decisions

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