We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Capital Budgeting Essay Sample

essay
The whole doc is available only for registered users OPEN DOC

Get Full Essay

Get access to this section to get all the help you need with your essay and educational goals.

Get Access

Capital Budgeting Essay Sample

Considering the information for the Proposal concerning the building of the new factory, the incremental cash flows are needed for the NPV analysis. The incremental cash flows are sales of $3 million a year which equals an increase in gross margin by $150,000 given a 5% gross margin and initial on investment of $10 million which is the cost of building the new factory. The savage value at the end of the project life will be $14 million. Given a 10% weighted average cost of capital, the following table shows the net present value that is computed for this project.

As shown in the present value table, the NPV of the capital project is $3,680,709 on the negative side which means the project will result in the decrease in the wealth of the company’s stockholders, resulting in violation of the wealth maximization concept. The analysis as per the proposal was done for 10years which is the expected economic life of the new factory. At the end of the economic life of the new factory, the cash flow includes the $14 million expected recovery from selling the factory. Time value of money is the concept that an dollar attain today will be valued more than the same dollar attained at a date in the future and can be computed by the following formula 1(1+r)^t. The PV of each of the cash flows was calculated by multiplying the cash flow with the present value column. If the weighted average cost of capital is 6%, then the net present value is negative $1,078,460 as shown in the table below which is higher than the net present value at 10% of the cost of capital.

It is safe to say that the higher the cost of capital the firm has, the lower the net present value. The capital project manages the planning and make up the non-current portion of a company’s balance sheet which is usually the largest asset portion. The long-term investment project requires relatively large sums to acquire, develop and maintain a capital asset such as land, roads and factory. Capital budgeting decisions is the deciding factor on whether a company can survive long-term or not.

We can write a custom essay

According to Your Specific Requirements

Order an essay

You May Also Find These Documents Helpful

The Environment for Foreign Direct Investment (FDI)

The environment for foreign direct investment (FDI) has become very competitive and it is important for countries to critically examine their investment policies and ensure their relevance and effectiveness in attracting and benefiting from FDI. Foreign direct investment (FDI) has the potential to generate employment, raise productivity, transfer skills and technology, enhance exports and contribute to the long-term economic development of the world�s developing countries....

Why Foreign Direct Investment Does Not Enter...

FDI can be described as international capital flows in which a firm in one country creates or expands a subsidiary in another. Its basic function is to provide capital to developing countries that face capital inadequacy due to and consequent of structural problems in the finance of economic development. Today, an increasing number of countries are using FDI and showing tremendous effort to attract FDI...

Impact of FIIs on Investment Portfolio

This paper aims to shed light on the behaviour of individual investors when foreign investments inject in the economy. The focus is to study the role of foreign institutional investors in changing the investment decisions of the individual investors and their contribution to economic growth through Capital accumulation in the economy , scope of the study is limited to India. Individual investor we mean by...

The Fabian Advertising

1.Executive Summary This report is commissioned to examine the new business strategies of Fabian Advertising. It draws attention to the facts that the sales revenue has been decreasing dramatically in recent years. The decrease in profits was because its clients have chosen its competitors’ services over theirs. As clients’ expectations and needs have changed, Fabian Advertising has to change to a new business mission -...

Finance Homework

Capital stock 1. The aggregate production capacity of existing capital goods in the economy. Zero or net change 2. Means a constant level in both the capital stock and output. Investments 3. Adjusts the capital stocks to maintain and even increase production and the level of the economic activities. Savings 4. The unspent portion of income during the period intended for spending. Simple savings equation...

Get Access To The Full Essay
icon
300+
Materials Daily
icon
100,000+ Subjects
2000+ Topics
icon
Free Plagiarism
Checker
icon
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access
immediately?

Become a member

Your Answer Is Very Helpful For Us
Thank You A Lot!

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59
Become a Member