calculate the Net Present Value, the Internal Rate of Return, the Profitability Index and a Payback for each proposal in order to make the best recommendation. cost of capital at 12% (that is our discount rate). SHOW YOUR WORK!! Let me know which Proposal you would recommend and why? Please rank them in the order of your preference and explain why you chose the winning bid proposal you did?
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.
Proposal #1 from Sunny Days, Inc.
Initial investment is $100M with cost savings each of the following 3 years of $60M.
Proposal #2 from Reflective Farms Inc.
Initial investment is only $20M but the cost savings each of the flowing 3 years is only $25M
Proposal #3 from Power Link Inc.
Initial investment is $100M with savings as follows: Year 1- $90M, Yr 2- $70M and Yr 3- $5M
calculate the
cost of capital at 12% (that is our discount rate). SHOW YOUR WORK!!
Let me know which Proposal you would recommend and why?
Please rank them in the order of your preference and explain why you chose the winning bid proposal you did?
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