Case Study: Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product. It will require the company to buy a new equipment that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option. 3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on Equivalent Annual Cost (EAC) to advise the Company Management which option should be chosen if the relevant discount rate is 9%? Option A Costs Initial Investment Year 1 Year 2 Option B 1,400,000 35,000 35,000 1,500,000 25,000 25,000 25,000 25,000 25,000 Year 3 35,000 Year 4 35,000 Year 5

Case Study: Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product. It will require the company to buy a new equipment that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option. 3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on Equivalent Annual Cost (EAC) to advise the Company Management which option should be chosen if the relevant discount rate is 9%? Option A Costs Initial Investment Year 1 Year 2 Option B 1,400,000 35,000 35,000 1,500,000 25,000 25,000 25,000 25,000 25,000 Year 3 35,000 Year 4 35,000 Year 5

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter12: Integer Linear Optimization_models

Section: Chapter Questions

Problem 3P: Spencer Enterprises is attempting to choose among a series of new investment alternatives. The...

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Spencer Enterprises is attempting to choose among a series of new investment alternatives. The potential investment alternatives, the net present value of the future stream of returns, the capital requirements, and the available capital funds over the next three years are summarized as follows: Develop and solve an integer programming model for maximizing the net present value. Assume that only one of the warehouse expansion projects can be implemented. Modify your model from part (a). Suppose that if test marketing of the new product is carried out, the advertising campaign also must be conducted. Modify your formulation from part (b) to reflect this new situation.
Part 3: Capital Budgeting and Project EvaluationCase Study: Assume that the company, where you are working as a team in Financial Department,is considering a potential project with a new product. It will require the company to buy a newequipment that will generate the same revenue for the company each year. The table below showsthe initial and annual costs for each option.3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on EquivalentAnnual Cost (EAC) to advise the Company Management which option should be chosen if therelevant discount rate is 9%?Costs Option A Option BInitial Investment 1,400,000 1,500,000Year 1 35,000 25,000Year 2 35,000 25,000Year 3 35,000 25,000Year 4 35,000 25,000Year 5 25,000
Part 3: Capital Budgeting and Project Evaluation Case Study: Assume that the company, where you are working as a team in Financial Department, is considering a potential project with a new product. It will require the company to buy a new equipment that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option. 3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on Equivalent Annual Cost (EAC) to advise the Company Management which option should be chosen if the relevant discount rate is 9%? Costs Option A Option B Initial Investment 1,400,000 1,500,000 Year 1 35,000 25,000 Year 2 35,000 25,000 Year 3 35,000 25,000 Year 4 35,000 25,000 Year 5 25,000 3.2. Risk Analysis and Project evaluation: Assume that the company finally chose Option B. It expects to sell 600,000 units of the new product for an average price of $15 per unit. The…
Capital Budgeting Decision Measurement Methods Prior to deciding on which long-term project/investment is most suitable, a company is going to analyze different options by considering various capital budgeting decision measurement methods. Some of these measurement methods include but not limited to payback period, discounted payment period, net present value, and internal rate of return. If you have a business and would like to invest in equipment that costs $1,000,000, which measurement method would you choose and why?
Scenario: Capital budgeting is utilized to determine if a project is worthwhile. The net present value (NPV), payback period, and internal rate of return (IRR) methods are used to rank and select which project to undertake. The following video outlines the NPV and IRR method of capital budgeting: Explain how to calculate the NPV, IRR, and payback period for each project. Utilizing the capital budgeting calculations, you will need to select the best investment for the company. These calculations will be based on the following scenario: Hunter Shipyard Industries has 3 potential projects to consider, all with an initial cost of $1,250,000. The company prefers to reject any project with a 4-year cut-off period for recapturing initial cash outflow. Given the cost of capital rates and the future cash flow for each project, determine which project the company should accept. Cash Flow Project A Project I Project U Year 1 250,000 450,000 250,000 Year 2 250,000…
A company wants to decide which project to undertake out of two projects A and B. For this purpose, it wants to evaluate each project that have the same initial investment (cost) but different cash flows for the next three years. The following table gives information on these two projects. The discount rate to be used is 8 percent, which is the WACC for the company. Use two methods of capital budgeting: The Net Present Value (NPV) Method and the Internal Rate of Return (IRR) Method, to evaluate and compare the two projects. Based on the outcome of calculations, choose the best project A or B and explain your decision for each method. Show all your work for each method step by step. Initial Investment and Cash Flows of Projects A and B in AED Project A Project B Initial Investment - 150,000 - 150,000 Year 1 Cash flow 20,000 50,000 Year 2 Cash flow 90,000 90,000 Year 3 Cash flow 70,000 60,000
Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, . use the Pl to determine which projects the company should accept. What is the Pl of project A? i Data Table (Round to two decimal places.) (Click on the following icon o in order to copy its contents into a spreadsheet.) Cash Flow Project A -%241,900,000 $150,000 $350,000 Project B Year 0 $2,300,000 $1,150,000 $950 000 $750,000 $550,000 Year 1 Year 2 Year 3 $550,000 Year 4 $750,000 $950,000 4% Year 5 $350.000 Discount rate 18% Print Done
Capital Budgeting Decisions A college intern working at Anderson Paints evaluated potential investments using the firm’s average required rate of return (r) as the discount rate in the evaluation process and he produced the following report for you as the capital budgeting manager at Anderson Paints: Project NPV IRR Risk LOM $1,500 12.5% High QUE 0 11.0 Low YUP (800) 10.0 Average DOG (150) 9.5 Low As the capital investment manager you must account for the risks associated with capital budgeting projects before making final recommendations and decisions. The company’s capital investment risk management policy calls for an adjustment of the firm’s average required rate of return by plus/minus 2% if a project’s…
Blue Spruce Inc. is comparing several alternative capital budgeting projects as shown below: Initial investment Present value of net cash flows O C.B.A OA.C.B. OC.A.B. OAB.C. A Save for Later $102000 112000 Using the profitability index, the projects rank as Projects B $142000 $182000 222000 132000 C & Attempts: 0 of 1 used Submit Answer PriSc
a. Capital budgeting is the process of identifying, analyzing and selecting investment projects whose returns are expected to extend beyond one year. This capital budgeting decision for an investment requires the analysis of some factors. List and explain three (3) of these factors. b. You have an investment opportunity that requires an initial investment of GH¢5,000 today and will pay GH¢6,000 in a year’s time. If an alternative investment with similar risk pays 25%, should you invest? c. You will retire in 18 years and you currently have GH¢250,000 saved, and your plan is to have GH¢1,000,000 at your retirement. What annual interest rate must you earn to reach this goal, assuming you do not save any additional funds? d. With practical example(s), differentiate between compounding and discounting. e. As a Business Finance student, what is the essence of the valuation principle in your personal life?
As a project manager, you need to update the status of your current project to the management. You have been allocated a capital budgeting to managing a larger-scale decisions by firm. Assume that a firm considers opening up a new store, which would require an initial investment outlay of RM60,000 as stated in the table 1 below. Table 1 End of Year Net Flow Revenue (RM) (60,000) 15,000 15,000 15,000 15,000 15,000 0 1 2 3 4 5 Discount 1.0000 į iv V GRAND TOTAL NPV (RM) (60,000) vi Vii Viji X 8,901.77 Xi Should you invest $60,000 in a project that will return $15,000 per year for five years? You have a minimum return of 8% and expect inflation to hold steady at 3% over the next five years. Determine the Net Present Value (NPV) for this project and proposed your recommendation to management regarding on this proposed project.
You are the investment manager of an appliance company. The industry is currently in the expansion face and the CEO would like to capture as much of the market share as possible. You asked your analysts to submit project proposals as summarized below. Project Discount Rate Investment Annual Cash Flow Project Life (Years) 10 3M 1M 5 12 4M 1M 8 8 5M 2M 4 8 3M 1.5M 3 12 3M 1M 6 Which projects should the manager choose? If you were given unlimited capital, which projects should be implemented? ABCDE