Q# 5. [10 pts] Calculating Net Present Values and Making the Financial Decisions General Electric (GE) has the opportunity to invest in 2 projects. Project A requires an investment of $1M which will give a return of $300,000 each year for 5 years. Project B requires an investment of $750,000 which will give a return of $100,000, $150,000, $200,000, $250,000 and $ 250,000 for the next 5 years. Then Calculate the Net Present Value (NPV) which can be used to decide which opportunity is better and should be invested in. For Project A 6 For Project A 7 8 Discount Rate 9 Initial Investment 10 11 12 13 14 15 16 17 Year 1 2 3 4 5 B 10% $1,000,000 Cash Flows $300,000 $300,000 $300,000 $300,000 $300,000 For Project B 23 For Project B 24 25 Discount Rate 26 Initial Investment 27 28 29 30 31 32 33 34 Year 1 2 3 4 5 B 10% $750,000 Cash Flows $100,000 $150,000 $200,000 $250,000 $250,000
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.
![Q#5. [10 pts] Calculating Net Present Values and Making the Financial Decisions
General Electric (GE) has the opportunity to invest in 2 projects. Project A requires an investment of $1M
which will give a return of $300,000 each year for 5 years. Project B requires an investment of $750,000 which
will give a return of $100,000, $150,000, $200,000, $250,000 and $ 250,000 for the next 5 years. Then
Calculate the Net Present Value (NPV) which can be used to decide which opportunity is better and should be
invested in.
For Project A
A
6 For Project A
7
8
10
11
12
13
14
15
16
17
Discount Rate
Initial Investment
Year
1
2
3
4
5
10%
$1,000,000
Cash Flows
$300,000
$300,000
$300,000
$300,000
$300,000
For Project B
23 For Project B
24
25
Discount Rate
26 Initial Investment
27
28
30
31
32
33
34
Year
1
2
3
4
5
B
10%
$750,000
Cash Flows
$100,000
$150,000
$200,000
$250,000
$250,000](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbbcd1629-5f2c-43eb-8f60-9142d7aea10c%2F47d064a2-91bd-4e10-96f4-aafa6cf63772%2Flpapwmn_processed.jpeg&w=3840&q=75)
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