CAPITAL BUDGETING DECISION OF KMART
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Solution Summary
This discusses the steps of capital budgeting decision by taking the example of Kmart
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a. Prepare and present a side table of the effects of depreciation, year by year, on the company's future cash flow, including the tax shields of depreciation and the "tax rebates" emanating from the deductibility of depreciation for tax purposes.
Kindly see the attached excel file for the calculations and analysis
b. Then construct the year-by-year after tax cash flow emanating from the proposed project and compute the net present value of the project.
Kindly see the attached excel file for the calculations and analysis
c. Assess the Net Present Value of the proposed project and write a short memo to management recommending acceptance/rejection of the proposal by your company. Explain what cost of capital was used for the computation of the net present value of the proposed project.
The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Capital budgeting is the process of analyzing proposed investments in plant and other long-lived assets. "Capital budgeting involves analyzing alternative long-term investments and deciding which assets to acquire or sell. Capital budgeting analysis outcome is uncertain; large amounts of money are usually involved; investment involves a long-term commitment; and decisions may be difficult or impossible ...
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