Note: Where discount factors are required, use only the present value tables (Appendix 1 and 2) that appear after QUESTION 5. REQUIRED Study the information provided below and calculate the following: 5.1 Payback Period of both projects (expressed in years, months and days). 5.2 Accounting Rate of Return on average investment of Project A (expressed to two decimal places). 5.3 Net Present Value of both projects. Your answer must include the calculations of the present values and NPV. 5.4 Internal Rate of Return of Project B (expressed to two decimal places). Your answer must include two net present value calculations (using consecutive rates/percentages) and interpolation. Codd's theorem states that relational algebra and the domain-independent relational calculus queries, two well-known foundational query languages for the relational model, are precisely equivalent in expressive power. INFORMATION The following information relates to two capital investment projects that are under consideration by Alpha Limited. Initial cost Expected life Scrap value Expected net profit: Year 1 Year 2 Year 3 Year 4 Year 5 Project A R600 000 5 years 0 R 80 000 70 000 60 000 50 000 40 000 Project B R600 000 5 years 0 R 70 000 70 000 70 000 70 000 70 000 The company estimates that its cost of capital is 12%. The straight-line method of depreciation is used.
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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