Comforting Mother manufactures baby furniture, clothing, strollers, and accessories. In the current year the company plans on purchasing a new machine to improve the quality and efficiency of production. Comforting Mother has prepared estimates of future cash flows over the following four years, at which point it will sell the machine for $9,500. The company focuses on tax minimization and calculated depreciation over the four years using the straight-line method, a useful life of four years, and a residual value of $0. (Click the icon to view the future cash flows.) The NPV of the investment is $42,087. Comforting Mother has just heard about payback period and IRR. Assume the CCA rate is 20% and refer to the relevant cash flows. Required Requirement 1. Calculate the payback period. (Round your final answer to two decimal places.) The payback period of the investment is year(s). Future cash flows Initial investment Annual cash flows from operations (excluding depreciation) Cash flow from sale of machine Required return on investment Income tax rate Relevant Cash Flows at End of Each year 1 2 3 Today (22,000) Print 12% 30% 26,000 26,000 Depreciation method CCA rate declining balance for income tax purposes Done 26,000 4 26,000 9,500 X
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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