StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Corporate Capital Budgeting - Assignment Example

Cite this document
Summary
The assignment "Corporate Capital Budgeting" presents student's answers to the tasks on Capital Budgeting. The project should be accepted because it satisfies all the criteria as shown by the results of the computation. The NPV is positive which also implies a positive profitability index…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER97.3% of users find it useful
Corporate Capital Budgeting
Read Text Preview

Extract of sample "Corporate Capital Budgeting"

Mutual exclusivity requires a business organization to choose only one project. Consistent with the goal of every company to maximize its wealth, the project with the higher NPV is chosen regardless of the investment cost. Thus, project B is chosen over project A even though its IRR and MIRR are lower.Since the lowest even life cycle of the projects under consideration is 12, the Equivalent Annual Annuity is utilized to make the best decision. Thus, the present values of cash flows within the first three years of each project are computed.

Afterward, these are divided by the PVIFA of the projects. For project A, this means dividing it with the PVIFA within 3 years at 8%, while for project B, a life of 4 years and 8% discount rate is utilized. In the end, the four-year alternative is chosen because it has a higher NPV ($63,100.92).Any investment should still be evaluated even though the investment is higher than the cash inflow. It should be noted that the profitability of an investment is not solely based on whether the investment exceeds the cash inflow because of the time value of money.

Evaluation of the project using different required rates of return also reveals that NPVs can be positive or negative depending on the discount rate.For this project, there are two computed IRRs which is because there is a change in the sign of cash flow for the project’s life span. For the first year, there is an outflow (negative cash flow), while in the second year cash flow is positive. During the end of its life, the project again has a negative cash flow. Since, the sign changes twice, two IRRs are expected.

As computed by Excel, these IRRs are 10.09% and 20.81% indicating that NPVs are zero in these discount rates.Figure 1 in the Appendix shows the computed NPVs at discount rates of 5% (NPV=-$730.16), 15% (NPV=$215.50), 18% (NPV=$159.44), and 25% (NPV=-$400.00). Thus, the project should be accepted at 15% and 18% discount rates. Noting the IRRs above, projects should be accepted at discount rates within 10.09% and 20.81%.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(Corporate Capital Budgeting Assignment Example | Topics and Well Written Essays - 500 words, n.d.)
Corporate Capital Budgeting Assignment Example | Topics and Well Written Essays - 500 words. https://studentshare.org/finance-accounting/1545301-mba-corporate-finance-capital-budgeting-6-question
(Corporate Capital Budgeting Assignment Example | Topics and Well Written Essays - 500 Words)
Corporate Capital Budgeting Assignment Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/finance-accounting/1545301-mba-corporate-finance-capital-budgeting-6-question.
“Corporate Capital Budgeting Assignment Example | Topics and Well Written Essays - 500 Words”. https://studentshare.org/finance-accounting/1545301-mba-corporate-finance-capital-budgeting-6-question.
  • Cited: 0 times

CHECK THESE SAMPLES OF Corporate Capital Budgeting

Capital Budgeting: Glazers Takeover Manchester United

capital budgeting: GLAZERS TAKEOVER MANCHESTER UNITED Table of Contents Table of Contents 2 Introduction 3 capital budgeting Theories 3 Evaluation Techniques 4 1.... iscounted Cash Flow (DCF) techniques 5 Corporate Valuation and Takeover 6 Takeover Bid of Manchester United – Background 7 Glazers' Motivation 8 Conclusion 12 References 14 Introduction capital budgeting decisions plays a pivotal role in the efficient running of a business organisation....
8 Pages (2000 words) Essay

Capital Budgeting Decisions

capital budgeting (Name) (Course) (Tutor) (Date) Introduction Finance is a dynamic topic that is important in various economic applications.... This topic has various fields such as capital budgeting which acts as an instrument in the monetary and fiscal policy.... capital budgeting is introduced in the economy so as to reduce deficit caused when expenditure exceeds revenue.... In addition, capital budgeting is also primarily concerned with investment in the economy within long-term assets....
10 Pages (2500 words) Research Paper

Capital Budgetting of Caledonia Products

CAPITAL BUDGETTINGH OF CALEDONIA PRODUCTS INTRODUCTION This report addresses capital budgeting for Caledonia Products.... Company is planning to introduce new product to the market and company seeks to analyze the investment opportunities by using capital budgeting techniques.... hellip; capital budgeting technique use to evaluate investment proposal with respect to their feasibility.... A- Caledonia Products should focus on free cash flows for evaluation of the project investment as compare to accounting profit in capital budgeting decision....
5 Pages (1250 words) Research Paper

Portfolio Project: Capital Budgeting Techniques

capital budgeting Techniques Customer Name University Name capital budgeting Techniques There are different techniques to make capital budgeting decisions in order to decide whether an investment is worthwhile or not.... Some of the capital budgeting techniques like payback rule, internal rate of return, NPV, and the profitability index.... This is a very simple method to evaluate an investment but it does not take many complicated factors that play a role in capital budgeting decisions....
5 Pages (1250 words) Assignment

Corporate Finance: Traditional Capital Budgeting

Corporate Finance: Traditional capital budgeting Introduction capital budgeting is the process of planning of long term corporate project related to the investment decision of the organization.... … Corporate Finance: Traditional capital budgeting Introduction capital budgeting is the process of planning of long term corporate project related to the investment decision of the organization.... The main objective of capital budgeting is to allocate firm's limited resources between competing opportunities (Harrison & John 2010)....
6 Pages (1500 words) Essay

The Capital Asset Pricing Model

CAPM has been used in number of applications ranging from public utility rates to corporate capital… No doubt, its impossible to get rid of all the risk irrespective of our diversification in investments.... In a rational equilibrium market, a mathematical model called capital asset pricing model (CAPM) is used to clarify the association of risk and return (Haugen, R.... Naturally each investor deserves a velocity of return to assist him for The beauty of capital asset pricing model (CAPM) is that it not only helps the investors to calculate investment risk but also gives them a fair expected idea about the return on their investment (Fabozzi Frank, 1998)....
7 Pages (1750 words) Essay

Company Budgeting System

The purpose of budgeting system is to efficiently manage performance of an organization.... After that a brief description of the modern techniques of budgeting will be made with the intention that the concept of budgeting system can be understood more clearly.... With a clear picture of the system of budgeting, it will now be helpful to discuss certain roles that budgeting plays within an organization.... Thus, roles of budgeting as an instrument for planning and control have been depicted in the next section....
14 Pages (3500 words) Essay

Capital budgeting

Unlike IRR and Payback techniques, the NPV is a very accurate tool that helps to determine if the project will be capital budgeting capital budgeting EEC calculation for NPV, IRR, and Pay Back for the investment opportunity YEAR CASHFLOWRATE OF DISCOUNTING=14%=(1+r)-nNPV0($2,000,000)1($2,000,000)1$500,0000.... EMOTo: EEC PresidentFrom:Date:Subject: capital budgeting(a) EECs cost of capital increases The president of EEC should be aware that if the cost of capital increases as discussed above, the underlying effect is a negative NPV....
2 Pages (500 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us