Capital Budgeting Scenarios

864 words 4 pages
Capital Budgeting Scenarios
Shannan Coleman
FIN/486
September 23, 2012
Sal Sadiq

Capital Budgeting Scenarios
Capital Budgeting: Proposal A – New Factory Proposal A is to build a new factory to decide if this would be a feasible move for the company they need to perform a net present value analysis. To do this they will only need to look at the incremental cash flows, which are as follows: 1. Initial investment of $10 million that will be the cost to build the new factory. 2. Sales of $3 million a year that will result in an increase of $150,000 in gross margin giving the company a 5% gross margin. 3. Value of salvage at the end of the life of the project of $14 million.
NPV Computation
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Firms are more likely to reject projects that have a high cost of capital and approve projects that have a low cost of capital. The capital budgeting process is used to make decisions on capital projects such as building new factories, advertising, and buying new equipment. Capital budgeting is important for companies and is a very predominate in strategic financial management. Capital projects are found in the non-current section of the balance sheet are usually the biggest asset section. Given the size of the non-current section making the right capital budgeting decisions will be the deciding factor of whether the company survives or not. Capital budgeting is used to make the above decisions it also can be used to make other

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