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    Financial Management: Budgeting and Personal Finance

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    Capital budgeting

    c. fields is considering installing solar panels on his house to decrease his electricity costs. Chester has a proposal that will cost $25,450.00 for a complete installation. Engineers have estimated that he will save an average of 26% from his electricity use from the grid.the engineers have projected that Chester will be able to put power back into the grid by 10% of the time, which will further reduce his electrically by 7.6%. Mr. Fields current average monthly bill for electricity is $656.00 he has his liquid funds invested in a small cap account that earns 9.93%. the funds for the investment would come from this account. The estimated life of the panels is 55years.

    1) what is his projected monthly savings
    2) what is his projected annual savings
    3) what is the present value of the outflows in this case
    4) what is the present value of the annual inflows in this case
    5) what is the approximate IRR on this investment
    6) what is the playback period in years and months
    7) should he make the investment

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    Solution Preview

    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.

    Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Several different procedures are available to analyze potential business investments. Some concepts are better than others when it comes to reliability but all provide enough information to get the general scope of the investment.

    The five procedures that provide useful information are the Net present Value (NPV), the Payback Rule, the Discounted Payback, the Internal Rate of Return (IRR), and the PI). These procedures will help rank the projects from the greatest investment to the worst.

    Thus capital budgeting has following characteristics:

    The exchange of current funds for future benefits.
    The funds are invested in long-term assets.
    The future benefits will occur to the firm over a series of years.

    Criteria of selection of Capital Budgeting project:

    It ...

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