gsteen Plc is considering a project with initial costs of £ 5,000,000. The project has a 5-year lifespan. The firm uses the straight-line depreciation approach to depreciate its fixed assets. Sales are forecast to be 650 units per year and the firm expects to sell the product for £5,500 per unit. The variable expenses for producing this output is estimated to be £2,800 per unit and the fixed costs are expected to be £290,000 per year. The required return is 12.5 percent and the relev
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.
3.4 Springsteen Plc is considering a project with initial costs of £ 5,000,000. The project has a 5-year lifespan. The firm uses the straight-line
impact on working capital requirements. The finance department believes that the price is accurate to within a
±1.5 percent range while costs may vary by ±4 percent.
(i) What is the sensitivity of the baseline operating cash flow to changes in the
sales price? Interpret your answer.
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