2. Compute the NPV of each project assuming the cost of capital is 10 percent. Note: Round your PV amounts to 4 decimal places. Project A Project B Project NPV 3. Compute the profitability index of each project. Note: Round your answer to 2 decimal places. Project A Project B Project C Profitability index
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Subject:
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Part 5: Performance Evaluation and Analysis Problems
[The following information applies to the questions displayed below.]
These problems relate to the Integrated Analytics Case: Bene Petit. Select the appropriate eBook link to open the Case
Overview, Case Background, and Part 5: Performance Evaluation and Analysis.
Part 5 Problem 01: Capital Budgeting
For this problem, assume that Taylor is considering investing in one or more of the following projects:
Project A: Expand the manufacturing facility to increase capacity by 20 percent. This investment is expected to cost $360,000 and
generate net cash flow of $80,000 per year for the next eight years.
Project B: Overhaul the company website to optimize the user experience and generate more traffic from online advertising. This
project would cost $210,000 and is expected to generate an additional $100,000 in sales for the next 10 years. Assume that the
contribution margin is 42 percent and that there would be no increase in fixed costs, including depreciation.
Project C: Invest in solar panels and more fuel-efficient delivery vehicles to reduce operating expenses (e.g., electricity and fuel) and
the company's carbon footprint. The initial investment in assets would be $360,000, which would be depreciated over five years. The
investment is expected to increase net income by $18,000 per year, after the depreciation adjustment.
Required:
1. Compute the payback period for each project.
Note: Round your answer to 1 decimal place.
Project A
Project B
Project C
Payback period
years
years
years](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc7fe5a73-45e4-4166-8ba1-50e355550dfc%2F47fa4367-686f-4ce8-acc6-56230160a3e7%2Fmt4d0vo_processed.jpeg&w=3840&q=75)
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