Exercise 26-19 (Algo) Net present value; internal rate of return; equal cash flows LO P3, P4 Quary Company is considering an investment in machinery with the following information. The company's required rate of return is 14% (PV of $1. EV of $1. PVA of $1, and FVA of $1) Note: Use appropriate factor(s) from the tables provided. Initial investment Useful life Salvage value Expected sales per year Required A Required B Materials, labor, and overhead (except depreciation) 9 years Depreciation-Machinery $ 304,000 Years 1-9 Year 9 salvage Totals $ 30,400 Selling, general, and administrative expenses 12,000 units Selling price per unit a. Compute the investment's net present value. b. Using the answer from part a, is the investment's internal rate of return higher or lower than 14%? Hint: It is not necessary to compute the IRR to answer this question. Complete this question by entering your answers in the tabs below. Compute the investment's net present value. Note: Negative net present values should be indicated with a minus sign. Round your present value factor to 4 decimals. Round your answers to the nearest whole dollar. Net Cash Flows x Present Value Required A Present Value of Net Cash Flows $ 60,000 30,400 20,000 $13 Required B >
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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