How To analyze capital budgeting?

timer Asked: Apr 8th, 2018
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Question description

Assume that you have received a capital expenditure request for $52,000 for plant equipment and that you are required to do a justification analysis using capital budgeting techniques. The company’s cost of capital is 12% and the equipment (investment) is expected to generate net cash inflows of $13,000 per year for 8 years and then $9,000 for one year.

You are to calculate and explain your quantitative calculations of each of the four capital-budgeting techniques listed, then, based upon these calculations, write a summary that provides a justification to proceed or not proceed with the project.

  • Calculate the project’s net present value (NPV).
  • Calculate the project’s internal rate of return (IRR).
  • Calculate the project’s profitability index.
  • Calculate the project’s discounted payback period.
  • Recommend whether the project should be accepted or rejected and explain why.

To complete this assignment, submit an Excel file with your time value calculations, and a two-page paper that explains the calculations and provides your recommended decision and explanation of why that decision is recommended. The paper must be submitted as a Word document and it must follow APA style guidelines.

Tutor Answer

School: Boston College

Here is the answer. Thank you

Capital budgeting process of an organization involves with determining its need of long
term investments (capital expenditures in nature), assessing and evaluating the feasibility of the
investments, and accepting the feasible projects (Vishwanath, 2007). Different techniques for
investment appraisal in the capital budgeting process include NPV technique, IRR technique, PI
technique, discounted payback period technique etc. (Vernimmen & Quiry, 2009). This paper
aims at appraising and evaluating the plant equipment project with $52000 confronted by a
company and making a recommendation regarding investment in the plant equipment project.
Appraising and Evaluating Plant Equipment Project
Calculation of Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index
(PI), and Discounted Payback Period Technique
The NPV analysis involves with calculating the discounted present value of cash inflows
and cash flows, and taking the difference of discounted present value of cash inflows and cash
flows to determine the NPV of the project (Vish...

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