Chevron Phillips has put into place new laboratory equipment for the production of chemicals: the initial cost is $1,100,000 installed. Chevron Phillips borrows 45% of all capital needed, and the borrowing rate is 12.5% over 4 years. The throughput rate. for in-process test samples has increased the capacity of the lab. with a net savings of $X per year. Depreciation follows MACRS- GDS, MARR is 11%, and the planning horizon is 6 years with a salvage value of $140,000 at that time. Use Goal Seek or Solver in Excel® to determine the value of X such that MARR is exactly achieved, no more and no less. if: a. The loan is paid back using Method 1 (interest only at the end of each year of the loan, plus principal at the end of the last year). b. The loan is paid back using Method 2 (equal annual principal payments plus interest on the unpaid loan balance). c. The loan is paid back using Method 3 (equal annual principal plus interest payments during each year of the loan). d. The loan is paid back using Method 4 (principal plus interest is paid at the end of the loan period). An important step in this problem is determining the principal and interest payments on the loan for the laboratory equipment. Method 1 has interest only at the end of each year of the loan plus principal at the end of the last year. Method 2 has equal principal payments plus interest on the unpaid loan balance. Method 3 has equal annual principal plus interest payments during each year of the loan. Method 4 has principal plus interest is paid at the end of the loan period. They financed 45% of the $1,100,000 at 12.5% per year over 4 years and keep it for 6 years. Based on this information, fill in the following chart: Method 4 Principal EOY 0 1 2 3 4 5 6 Method 1 Principal $0.00 $0.00 $0.00 1a $0.00 $0.00 Interest 1b 1b 1b 1b $0.00 $0.00 Method 2 Principal 2a $61.875.00 2a 2a 2a $0.00 Interest $0.00 2b $30.937.50 $15,468.75 $0.00 $0.00 Method 3 Principal $102,815.42 $61.875.00 $115.667.34 $49,023.07 3a $146.391.48 $0.00 Interest $0.00 3b $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 4a $0.00 $0.00 Interest $0.00 $0.00 $0.00 4b $0.00 $0.00
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.
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