(engineering economics) A building was purchased by the city government with a gradual payment of Rp. 20 billion at the time of purchase and followed by Rp. 40 billion a year later. The building is expected to be used by the community for 20 years starting after the second payment is made. During operation the dam will require operational and maintenance costs of Rp. 750 million annually. Meanwhile, the benefits that will be obtained by the community as a result of these facilities can be equivalent to Rp. 5 billion per year. In addition, this facility also generates direct income of Rp. 4.7 billion per year. Alternatively, the building can be renovated prior to use. If it is going to be renovated, the city government needs to spend an additional Rp. 10 billion for the two payments as mentioned above. The operational and maintenance costs have not changed, which are still Rp. 750 million per year, while the annual income will increase to Rp. 5.6 billion. Determine alternatives without renovation or with renovation for these public facilities. Use the Benefit/Cost Ratio to analyze the alternative with i = 12% per year from this project if the estimated salvage value is Rp. 20 billion if the building is not renovated or Rp. 25 billion if the building is renovated.
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.
Step by step
Solved in 3 steps
