...To what extent is NPV an effective Investment appraisal tool? Capital Budgeting: To understand the value of NPV, the identification of its purpose in capital budgeting should be addressed beforehand, with its alternatives. This process of Capital Budgeting refers to the evaluation of potential in large scale business expenses and investments over long-term ventures. Often this step in the investment appraisal assessment, identifies the cashflows over the projects life-span, determining its generated returns in comparison to the organisations benchmark targets. (Book) Flowton’s options of replacing its older systems (Project A) or upgrading them to a centrally controlled platform (Project B) are considered such a venture. Ideally, Flowton would...
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...Himalayan Publishing Company Case on | Capital Budgeting | August 31, 2013 | Himalayan Publishing Company: Capital Investment Decision Synopsys: Himalayan printing and publishing company is a family owned specialty printing enterprise founded by the Chhetri brothers. The firm follows a conservative capital financing approach avoiding the use of debt. Mr. Ranjan Karki, the firms current Vice-President of Finance is responsible for the both internal and external financial operation however, the scope by far is limited to internal because of the all equity capital structure the firm follows. The firm operates mainly as a full range printer of high quality, four colors offset advertising material, calendars, specialty tabloids, business printing and some books. The competition in most of their market segment is based on quality products and rapid delivery on short notice than on the price of various services. The volume in the business order has been increasing and the indications show that it will continue to increase in the future. Recently Himalayan has lost several sizable contracts because of limited capacity which lead to failure to produce the material in the short time the customer required. On the basis of the financial projections approximately Rs. 1.5 million will be available for the investment. The estimated cost of equity is calculated to be 15 percent, which has been drawn from the historical practice of internal funding. For any additional fund the...
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...Every business would like to do everything • But it all costs • Capital expenditure on new projects or purchases (fixed assets) needs to be planned • Capital is always rationed Scenario: • Your business wishes to expand its product line • It is considering Products A and B but it can only afford to do one. • How does it decide? What main factors affect the investment decision • How much will it cost ? Investment appraisal methods used in practice • How much will I get back ? • When will I get the income ? • 4 main techniques available ranging from simple to moderately complex MULTIPLE APPRAISAL METHODS: Non‐discounted cash flow techniques: 1. Payback period (PBP) 2. Accounting rate of return (ARR/ROCE/ROI) Discounted cash flow techniques(DCF): 3. Net Present Value (NPV) 4. Internal Rate of Return (IRR) 6 1 MBA7001 Accounting for Decision-Makers Week 6 Lecture – Capital Investment Appraisal Objectives (1)...
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...in different economic philosophies. Hence, determination of cost of capital would carry greatest impact on the investment evaluation. A number of capital budgeting techniques are used in practice. They may be grouped in the following two categories: - I. Capital budgeting techniques under certainty; and II. Capital budgeting techniques under uncertainty 2. Capital budgeting techniques under certainty Capital budgeting techniques (Investment appraisal criteria) under certainty can also be divided into following two groups: 2.1 Non-Discounted Cash Flow Criteria: - (a) Pay Back Period (PBP) (b) Return On Investment (ROI) 2.2 Discounted Cash Flow Criteria: - (a) Net Present Value (NPV) (b) Internal Rate of Return (IRR) 3. Non-Discounted Cash Flow Criteria: These are also known as traditional techniques: 3.1 Pay Back Period (PBP) : The pay back period (PBP) is the traditional method of capital budgeting. It is the simplest an perhaps, the most widely used quantitative method for appraising capital...
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...Capital Budgeting Analysis Amanda Kocanda, DeUndre’ Rushon, HuongTran,& Morgan Gibreal MBA 612, Financial Strategy October 28, 2014 Bellevue University Abstract Within this paper, an overview of the general capital budgeting process and how it is implemented within organizations is defined and reported. Key terms related to capital budgeting are also defined. Risk analysis based on the Net Present Value (NPV) is performed on the salvage values before and after sales tax values along with the different sale ranges. Keywords: NPV, NPV Profile, NPV, IRR, multiple IRRs, ranking conflict of NPV vs. IRR, payback period, profitability index, discount rate, cost of capital concept, cash flow analysis, cash flow timeline, conventional cash flow stream, non-conventional cash flow stream, sunk cost, opportunity cost, independent projects, mutually exclusive projects Overview of the Capital Budgeting Process Every business requires some source of funds to maintain operation and competitive advantages. Whether it’s a manufacturing or servicing firm, it requires financing. Financing sources can be obtained through debt, bond issuance, bank loan, equity, and issuance of preferred and/or common stock. The amount of debt and equity builds the firm's capital structure. The firm's corporate or business strategy is the proportion of capital structure it needs to finance its operation. The combination of debt and equity totals the cost of capital for the firm. The...
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...JWI 530: Financial Management I Academic Submissions and Evaluations Assignment 2: Management Accounting Application Due Week 10, Day 7 (Weight: 22.5%) In this assignment you will demonstrate your understanding of capital investment techniques by evaluating the following three case studies. The homework answers and all this homework help was offered at and you should not submit or make it your own. We provide homework answers at http://allhomeworktutors.com/ and the work may have already be submitted for marking. Case Analysis 1 – Weight 20% of total assignment You work for a small, local telecommunications company. In five years, the company plans to undertake a major upgrade to its servers and other IT infrastructure. Management estimates that it will need up to $450,000 to cover all related costs; however, as a fairly young company, the goal is to pay for the upgrade with cash and not to take out loans. Right now, you have $300,000 in a bank account established for Capital Investments. This account pays 6% interest, compounded annually. A member of the finance department has approached you with an investment opportunity for the $300,000 that covers a five-year period and has the following projected after-tax cash flows: |Year |Projected Cash | | |Flow | | | | |1 |$94,000 | | | ...
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...rate of return method of evaluating investment projects are as follows: Time Value of Money: The first and the most important thing is that it considers the time value of money in evaluating a project which is a big lacking in accounting rate of return. Simplicity: The most attractive thing about this method is that it is very simple to interpret after the IRR is calculated. It is very easy to visualize for managers and that is why this is preferred till the time they come across certain occasional situations such as mutually exclusive projects etc. Hurdle Rate / Required Rate of Return has Not Required: The hurdle rate is a difficult and subjective thing to decide. In IRR, the hurdle rate or the required rate of return is not required for finding out IRR. It is not dependent on the hurdle rate and hence the risk of a wrong determination of hurdle rate is mitigated. Required Rate of Return is a Rough Estimate: A required rate of return is a rough estimate being made by the managers and the method of IRR is not completely based on required rate of return. Once IRR is found out, we can compare it with the hurdle rate. If the IRR is far away from the estimated required rate of return, the manager can safely take the decision on either side and also keep a room for estimation errors. DISADVANTAGES OF INTERNAL RATE OF RETURN: The method of internal rate of...
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...Capital Budgeting 1. Critical profitability analysis (Exhibit 1).Additional shortcomings omitted by Faulkner Poor capital-budgeting decisions can be harmful to the Sugar Lake Refining and Processing Company as it will involve spending large amounts money to be recovered for a long time. Edwards & Ivancevich, (2011) demonstrate that the other harm would be the opportunity cost arising from not taking the opportunity and it turns that a competitor comes in. The worst effect is when poor budgeting decision is made and the firm ends up losing all or part of the invested monies simply because the proposed project did not realize the expected benefits. This can be demonstrated by concerns arising from laying off workers, having to continue to meet the fixed costs as well as the wasted funds and energies in advertising (p.277). Faulkner fears of profit being overstated are unjustified especially considering that recently Butler has had inquiries from several other grocery and restaurants willing to pay the price of the product. The company inability to supply due to optimum capacity may have been the cause by management’s failure to read the market and act favorably. A better response would be to request for a survey establishing the potential of the market. Taylor and Butler discussions on the issue of availability of space for the expansion have good insights with the suggestion of leasing the company under receivership. The best decision will be reached not by appreciating the...
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...analysis ............................................................................................................................ 2 2.2. Indian government ....................................................................................................................... 2 3. Investment Thesis................................................................................................................................ 3 4. Valuation ............................................................................................................................................. 5 4.1 ARR ................................................................................................................................................ 6 4.2 IRR.................................................................................................................................................. 6 4.3 Limitations ..................................................................................................................................... 7 5. Key risks ............................................................................................................................................... 7 6. Bottom line .......................................................................................................................................... 9 6. References...
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...Victoria chemicals PLC (A): the Merseyside Project As a world wide major competitor in the chemical industry, Victoria Chemicals is a leading producer of polypropylene, a polymer that is used in a variety of products around the globe. Polypropylene is known for its strength and malleability and was priced as a commodity. The company operates two plants that produce polypropylene, one at Merseyside, England and the other at Rotterdam, Holland. Both plants were identical in scale, design, and age. However, Morris Greystock, the manager for the Merseyside plant saw a decline in the company’s stock, and decided to improve the position of the company. To do that, she came up with a project to increase production efficiency, rationalize the Polypropylene production line and renovate the Merseyside plant since the Merseyside production process was old and therefore higher in labor than competitors. The project Greystock wanted to propose to senior management consisted of GBP 12 million expenditure. Grestock was faced with some issues and decisions related to the project that she had to address. Those issues includes, issues with the transport division, the ICG and marketing department, the assistant plant manager, the treasury staff, and evaluating the capital expenditure. Issues: Concerns of the Transport division: Greystock’s argument is that the purchase of tank cars shouldn’t be included in the initial outlay because the company will use the transport division’s excess capacity...
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...Project Risk and Cost Management Case Study Diamond Chemicals PLC (A): The Merseyside Project Group Members: Divya Yadav, Lamia Nafees, Ashwin Chadaga, Deeshanu Sharma Executive Summary This summary report provides an analysis and estimation of capital budgeting proposed that is being proposed to the Senior Management in Diamond Chemicals. The goal of this project was to save energy, improve process flow and product outputs of the Diamond Chemical Merseyside factory. Diamonds Chemicals, a major competitor in the worldwide chemical industry and a leader in the producer of polypropylene. Lucy Morris, the plant manager estimated £9 million project expenditure to renovate and rationalize the polypropylene production line at the Merseyside Plant in order to make up for deferred maintenance and exploit opportunities to achieve increased production efficiency. The Merseyside plant was constructed in 1967. Diamond Chemicals produced polypropylene at two sites, Merseyside and in Rotterdam, Holland. The company was a supplier to customers based in Europe and in the Middle East. In order for the project to take place the entire polymerization line would need to be closed for 45 days, however, and because the Rotterdam plant was operating near capacity, Merseyside’s customers would buy from competitors. Frank Greystock, the controller at Diamond Chemicals believed that the loss of customers would just be temporary. As a result, the benefits...
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...1st Scenario MINI-CASE ABC CORPORATION The initial cash outlay at Time 0 is simply the cost of the new equipment, $15,000,000 and the ABC’s required return of 12 percent. The marketing study and the research and Development is both sunk costs and should be ignored. (Assuming CCA class is 43, the CCA rate of 30 percent and corporate tax is 35 percent). Sales Sales VC Fixed costs Year 1 $17,500,000 6,020,000 3,000,000 Year 2 $20,000,000 6,880,000 3,000,000 Year 3 $25,000,000 8,600,000 3,000,000 Year 4 $21,250,000 7,310,000 3,000,000 Year 5 $18,750,000 6,450,000 3,000,000 Required: Calculate OCF from the above information. C d Tc S k n $15.000.000,00 .30 .35 -‐ .12 5 Years CCA table Beggining UCC CCA (30%) End UCC Sales VC FC EBIT Year 1 $2.250.000,00 $12.750.000,00 $6.020.000,00 $3.000.000,00 Year 2 $3.825.000,00 $8.925.000,00 $6.880.000,00 $3.000.000,00 Year 3 $8.925.000,00 $2.677.500,00 $6.247.500,00 $8.600.000,00 $3.000.000,00 Year 4 $6.247.500,00 $1.874.250,00 $4.373.250,00 ...
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...AN APPRAISAL OF CAPITAL BUDGETING TECHNIQUES (A CASE STUDY OF FORTHRIGHT SECURITIES AND INVESTMENT LIMITED, MARINA, LAGOS) BY OLOJOTUYI OLUFEMI O. FPA/AC/09/3-0101 BEING A PROJECT REPORT SUBMITTED TO THE DEPARTMENT OF ACCOUNTANCY SCHOOL OF BUSINESS STUDIES, THE FEDERAL POLYTECHNIC, ADO EKITI EKITI STATE IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR THE AWARD OF HIGHER NATIONAL DIPLOMA IN ACCOUNTANCY DECEMBER, 2011. CERTIFICATION This is to certify that this research project was duly carried out by OLOJOTUYI OLUFEMI O. of the Department of Accountancy, School of Business Studies Federal Polytechnic, Ado Ekiti, Ekiti State and accepted as meeting part of the requirements for the award of Higher National Diploma in Accountancy. ……………………………… ……………………………. MR. UCHEFUNA D.I MRS. M. OLOWOLAJU Project supervisor H. O.D Accountancy …………………………….. …………………………….. DATE DATE DEDICATION This project work is dedicated to Almighty God and to my parent Mr. and Mrs. Olojotuyi. ACKNOWLEDGEMENT I give glory to God, for his guidance, protection and strength throughout the period of this project work. Thanks to my supervisor, Mr. Uchefuna D.I who has been of tremendous help in guiding and encouraging me through this process. Furthermore, for his serious yet gentle commitment to the completion of this...
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...Worldwide Paper Company 1. สรุปเนื้อหา Bob Prescott เป็นผู้ควบคุมดูแลโรงไม้ Blue Ridge กำลังพิจารณาที่จะเพิ่มลานไม้ Longwood แห่งใหม่ ซึ่งมีข้อดี 2 ประการคือ โรงไม้จะไม่ต้องซื้อ shortwood จากsupplierอีกต่อไป และสร้างโอกาสที่จะขาย shortwood ในตลาดเปิดซึ่งเป็นลูกค้ากลุ่มใหม่ของ WPC โดยลานไม้ใหม่นี้ ไม่เพียงแต่ช่วยลดต้นทุนในการดำเนินงาน ยังเพิ่มรายได้ให้กับบริษัท ลานไม้แห่งใหม่นี้จะใช้เทคโนโลยีที่สามารถใช้ longwood ในการดำเนินงานได้โดยตรง ซึ่งปัจจุบันทางโรงงานต้องใช้ shortwood ที่ซื้อมาจากคู่แข่งคือโรงไม้ Shenandoah ถ้า Prescott เพิ่มเครื่องจักรใหม่นี้ เขาก็ไม่จำเป็นที่จะต้องสั่งซื้อไม้จากShenandoah และยังสามารถแข่งขันกับ Shenandoah ในตลาด shortwood อีกด้วย คำถามคือผลประโยชน์ที่คาดว่าจะได้รับนั้นมากพอที่จะครอบคลุมค่าใช้จ่ายในการลงทุนมูลค่า 18 ล้านเหรียญ รวมถึงเงินทุนหมุนเวียนส่วนเพิ่มในการลงทุน 6 ปีต่อจากนี้หรือไม่ ค่าใช้จ่ายในการลงทุนจะถูกใช้ในช่วง 2 ปีแรก โดยใช้ในปี 2007 เป็นจำนวน 16ล้านเหรียญ และอีก 2 ล้านเหรียญในปี 2008 เมื่อลานไม้แห่งใหม่เริ่มเปิดดำเนินงานในปี 2008 โรงไม้จะมาสามารถลดต้นทุนในการดำเนินงานได้ 2 ล้านเหรียญในปี 2008 และ 3.5เหรียญต่อปี ในปีถัดๆไป ซึ่งเกิดจากการที่โรงไม้ผลิต shortwood ได้เอง โดยไม่ต้องซื้อจากโรงไม้อื่น นอกจากนี้ Prescott ยังวางแผนที่จะขาย shortwood ในตลาดเปิดให้เร็วที่สุด โดยในปี 2008 เขาคาดว่าจะได้รายได้ประมาณ 4 ล้านเหรียญ และถึง 10ล้านเหรียญในปี 2009 โดยจะยังได้ 10 ล้านเหรียญไปตลอดจนถึงปี 2013 Prescott ประมาณการว่าต้นทุนขาย (ก่อนหักค่าเสื่อมราคาสะสม) คิดเป็น 75% ของรายได้ และ SG&A ค่าใช้จ่ายดำเนินงาน คิดเป็น 5% ของรายได้ นอกจากค่าใช้จ่ายในการลงทุนจำนวน...
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...Present Value: Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. NPV is calculated using the following formula: NPV= -C0 + C11+r+ C21+r2+…+ Ct(1+r)t - C0 = initial investment C = cash flow r = discount rate t = time If the NPV of a prospective project is positive, the project should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. Example of Net Present Value To provide an example of Net Present Value, consider a company who is determining whether they should invest in a new project. The company will expect to invest $500,000 for the development of their new product. The company estimates that the first year cash flow will be $200,000 the second year cash flow will be $300,000, and the third year cash flow to be $200,000. The expected return of 10% is used as the discount rate. The following table provides each year's cash flow and the present value of each cash flow. Year | Cash Flow | Present Value = FV(1+r)t | 0 | - 500,000.00 | -500000/(1.10)^0 = -500000.00 | 1 | 200,000.00 | 200000/(1.10)^1 = 181,818.18 | 2 | 300,000.00 | 300000/(1.10)^2 = 247,933.88 | 3 | 200,000.00 | 200000/(1.10)^3 = 150,262.96 | NPV = -500000.00 + 181,818.18 + 247...
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