- calculate the minimum payback period - calculate the NVP of the projected cash flow - calculate the internal rate of return (IRR) Expansion Project Title Project Description and Details Project Cost (Initial Investment) First-Year Cash Flow Annual Growth Rate (5 years) Expenses as a percentage of Revenues Payback Period NPV IRR Development of Straight Caffeine This project is another brainchild of the research and development team. It extracts the caffeine that is naturally found in coffee and concentrates it into a liquid, squirtable additive that can be used in any drink. R&D has been using variations of this liquid caffeine to increase department productivity. Since it already exists, the investment would be minimal. $6,500,000 $2,500,000 4% 32% The company assumes a discount rate of 6% for this project and wants the shortest payback possible period while maximizing profits. Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Year 5 Cash Flow Projected Revenues at annual growth rate Projected Expenses at 32% of Revenue Annual Cash Flows Discount rate for each year (6%)
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.
- calculate the minimum payback period
- calculate the NVP of the projected cash flow
- calculate the
| Expansion Project Title | Project Description and Details | Project Cost (Initial Investment) | First-Year Cash Flow | Annual Growth Rate (5 years) | Expenses as a percentage of Revenues | Payback Period | NPV | IRR |
| Development of Straight Caffeine | This project is another brainchild of the research and development team. It extracts the caffeine that is naturally found in coffee and concentrates it into a liquid, squirtable additive that can be used in any drink. R&D has been using variations of this liquid caffeine to increase department productivity. Since it already exists, the investment would be minimal. | $6,500,000 | $2,500,000 | 4% | 32% |
The company assumes a discount rate of 6% for this project and wants the shortest payback possible period while maximizing profits.
| Year 0 Cash Flow | Year 1 Cash Flow | Year 2 Cash Flow | Year 3 Cash Flow | Year 4 Cash Flow | Year 5 Cash Flow | |
| Projected Revenues at annual growth rate | ||||||
| Projected Expenses at 32% of Revenue | ||||||
| Annual Cash Flows | ||||||
| Discount rate for each year (6%) |
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
