Siesta Incorporated is looking at a project and has the appropriate cash flow. However there is much disagreement on the appropriate discount rate to use with the project. a. Barracuda Count Dracula, the CFO, has requested that you provide the NPV atl various interest rates between 0% and 40% at 2% intervals. That way when they are able to access the proper discount rate for this project they will know if the project is a go. b. In addition you are to graph your NPV results at each interest rate to show the NPV profile of the project. c. Confirm that the IRR intersects the horizontal axis at the $0 NPV for the project. The cash flow for the project is listed below in millions of dollars: Year CF 2 0 1 -35.05 3.44 5.79 4 5 6 7 8 3 9.23 14.68 18.39 21.07 16.42 11.68 Show your results in a spreadsheet. Copy your graphs from MS-Excel to MS-Word and write your recommendations in the MS-Word file.
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.
In a typical capital budgeting project, timing and quantum of cash flows emanating from a project are known. We have to find NPV at different discount rate, draw the NPV profile and identify IRR.
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