Description
Assignment 2—Applying Decision-Making Skills
As a manager, part of your role is to develop strategy, and share this strategy with various stakeholders within the organization. This assignment will allow you to take your findings as a manager and communicate these findings to those who are affected.
Your company has been presented with a decision on replacing a piece of equipment for a new computerized version that promotes efficiency for the upcoming year. As manager you will need to decide whether or not the purchase of the new equipment is a worthwhile investment and to communicate your recommendations to Executive Management for a final decision. To be convincing, sufficient support for your recommendations must be provided in order to be considered valid and accepted.
Existing Equipment | |
Original Cost | 60,000 |
Present Book Value | 30,000 |
Annual Cash Operating Costs | 145,000 |
Current Market Value | 15,000 |
Market Value in Ten Years | 0 |
Remaining useful Life | 10 years |
Replacement Equipment | |
Cost | 600,000 |
Annual Cash Operating Costs | 50,000 |
Market Value in Ten Years | 0 |
Useful Life | 10 years |
Other Information | |
Cost of Capital | 10% |
Payback requirement | 6 years |
In this assignment, use the information above to develop a comprehensive analysis using NPV, Payback Method, and IRR to develop a recommendation on replacing the existing equipment with a new computerized version. Develop an executive summary of your findings in a Microsoft PowerPoint presentation format to present to Executive Management.
Do the following in your presentation:
- Include a statement of the problem or topic, a concise analysis of the findings, and a recapitulation of any main conclusions or recommendations.
- Be sure to incorporate specific details to highlight or support the summary including calculations.
- Using your knowledge of capital budgeting techniques, explain how principles of capital budgeting, such as the payback method, IRR, and NPV, can be used to assess the potential projects and assist in the decision-making process.
Develop a 10-12 slide presentation in PowerPoint format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M4_A2.ppt.
By the due date assigned, deliver your assignment to the Submissions Area
Explanation & Answer
Completed
Running head: CAPITAL BUDGETING TECHNIQUES
Capital Budgeting Techniques
Students Name
Institution Name
1
CAPITAL BUDGETING TECHNIQUES
2
Capital Budgeting Techniques
The capital budgeting techniques are the various method that are used for capital budgeting and
in this case the decision of which investment to opt for will be decided based on Payback
method, Internal Rate of Return, Net Present Value and finally Profitability Index.
Payback Method
Under this technique an investment is accepted or rejected based on the payback period.
However, since the payback period is given 6 years we can use it to calculate net annual cash
inflow.
𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑚𝑛𝑡 𝑟𝑒𝑞𝑢𝑟𝑒𝑑
Payback Period = 𝑁𝑒𝑡 𝐴𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤
Net annual cash inflow =
=
𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑚𝑛𝑡 𝑟𝑒𝑞𝑢𝑟𝑒𝑑
Payback Period
600000
6
= 100,000
This implies that the new investment has a projected cash inflow of 100,000. Compared to the
current net cash inflow of the current investment which is 10,000 the new project is much better
hence based on the payback method the new investment is more profitable.
Net Present Value
The Net Present Value is calculated by obtaining the difference between the value of cash
inflow and the value of cash outflow.
NPV = (Net annual cash inflow - Net annual cash outflow)
= (100,000 – 50,000)
= 50,000
50,000 is the net present value of the new project which is higher compared to the present book
value of the current project which is 30,000 hence b...