A small company heats its building using a gas furnace. It expects to spend $8,800 on natural gas this first year. The cost of the natural gas is expected to increase by 10% per year every subsequent year. There is also the maintenance cost on the gas furnace which is expected to be $851.20 in the first year and to increase by 12% per year every subsequent year. The planning horizon is 13 years and the company uses an annual interest rate of 15% for economic analysis of its investments (a) The projected annual cost of natural gas in year 13 is $ (Round to nearest dollar) (b) The projected annual maintenance cost of the furnace in year 13 is $ (Round to nearest dollar) (c) The total present worth of operating and maintaining the furnace over the 13 years is $ (Round to nearest dollar)
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.
Step by step
Solved in 3 steps with 2 images
