Luthra Corporation is considering a new capital investment on the Island. The project is expected to last 6 years. Their investment of $2,000,000 will consist of an asset in a CCA class with rate of 15% subject to the half year role. This asset will be sold at the end of the project for 60% of the original cost. The project will require an extra $45,000 in working capital this amount will be recovered at the end of the project. Expenses will be $100,000 per year and revenues will be $330,000 in year 1 followed by $450,000 for the rest of the project. Find the NPV if Luthra Corporation has a 30% tax rate and a cost of capital of 11%. Your president Poojan would like to see your work so clearly show all the components of your calculation in the work you submit later including: Calculate the NPV for this project and enter the answer here. On ylar work make sure you show and clearly label: Required investment . CCA tax shield Total initial investment Working capital recovery PV of income PV of selling price recommendation Your Answer:
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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