Capital 20Budget 20Analysis 20Group 20P
Amanda Kocanda, DeUndre’ Rushon,
HuongTran,& Morgan Gibreal
MBA 612, Financial Strategy
October 28, 2014
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, …show more content…
Profitability Index (PI) is the present value of a project’s cash inflows divided by the initial cash outflow.
PI= (CF1/(1+r)^1+ CF2/(1+r)^2+…+ CFN/(1+r)^N)/CF0
Ranking conflict of NPV vs. IRR,
Sunk costs are the cost already spent and are not recoverable.
Report of the Capital Budgeting Analysis
2C. Summary report of Capital Budgeting Analysis.
Techniques used for capital budgeting in corporate finance to decide whether or not to accept new projects include: NPV, IRR, PBP, and PI.
Replacement Projects: decisions to replace old equipment – those are among the easier of capital budgeting techniques. It is important to decide whether to replace the equipment when it wears out or to invest in repairing the machine.
Basic Principles of Capital Budgeting
Capital budgeting usually uses the following assumptions:
• Decisions are based on cash flows not income
• Timing of cash flows is important
• Cash flows are based on opportunity cost: cash flows that occur with an investment compared to what they would have been without the investment
• Cash flows are analyzed on after-tax basis:
• Financing costs are ignored because they are incorporated in WACC – that is why counting them twice would be considered double counting
Depreciation = (book value – salvage