Explore BrainMass
Share

Capital Budgeting Technique.

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Use the capital budgeting technique to justify India's alternate investment decisions.

Also, support your choice of the discount rate used in the calculation of of NPV...

© BrainMass Inc. brainmass.com October 16, 2018, 8:04 pm ad1c9bdddf
https://brainmass.com/business/net-present-value/capital-budgeting-technique-137053

Solution Preview

Financial Plan of Moon Mobile Handsets
Our organization is manufacturing Moon mobile handsets and we are going to launch it into India. Sound Planning is the first step of the success of the business. It will act as a guidance and road map for the organization.

"A business plan is a summary of how a business owner, manager, or entrepreneur intends to organize an entrepreneurial endeavor and implement activities necessary and sufficient for the venture to succeed. It is a written explanation of the company's business model."
(www.bplans.com)

Business plan will include Road map of the following:

? Determine where the company needs to go
? Forewarn of possible roadblocks along the way
? Formulate responses to contingencies
? Keep the business on track to reach its planned goals
? Include functional plans or sub plans

Financial plan, budgeting and forecasting is one of the important components of the business plan and success of the business. This consists of details of raising and allocation of financial resources in an efficient and effective manner. Our plan will include cost structure, NPV and sensitivity analysis.

Investments and Cost structure

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.
Thus this decision regarding the launch of new intelligent remote device is a capital budgeting decision. The techniques which can be used for evaluating the project are the Net present Value (NPV), and Internal Rate of Return (IRR).

This is a capital budgeting project because it has following characteristics:

? The exchange of current funds for future benefits.
? The funds are invested in long-term assets.
? The future benefits will ...

Solution Summary

The solution uses capital budgeting techniques to justify India's alternate investment decisions.

$2.19
Similar Posting

Capital budgeting techniques to maximize share wealth

The objective of a firm is to maximize shareholder wealth. The Net Present Value (NPV) method is one of the useful methods that help financial managers to maximize shareholders' wealth.

Suppose the company that you selected for the Module 1 SLP is considering a new project that will have an initial cash outflow of $125,000,000. The project is expected to have the following cash inflows:

Year Cash Flow ($)

1 2,000,000

2 3,500,000

3 13,500,000

4 89,750,000

5 115,000,000

6 120,000,000

If the project's cost of capital (discount rate) is 12.5%, what is the project's NPV? Should the project be accepted? Why or why not?

You may use the following steps to calculate NPV:

1. Calculate present value (PV) of cash inflow (CF)

PV of CF = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3 + CF4 / (1+r)^4 + CF5 / (1+r)^5 + CF6 / (1+r)^6

Where the CFs are the cash flows and r = the project's discount rate.

2. Calculate NPV

NPV = Total PV of CF - Initial cash outflow

or -Initial cash outflow + Total PV of CF

r = Discount rate (12.5%)

If you do not know how to use Excel or a financial calculator for these calculations, please use the present value tables. Brealey, R.A., Myers, S.C., & Allen, F. (2005). Principles of corporate finance, 8th Edition. McGraw−Hill. Retrieved June 2014 from http://jcooney.ba.ttu.edu/fin3322/Brealey%20Files/Appendix%20A%20-%20Present%20Value%20Tables.pdf (Please use Table 1)

Also, consider reviewing http://www.tvmcalcs.com for financial calculator tutorials.

Besides NPV, there are other capital budgeting methodologies including the regular payback period, discounted payback period, profitability index (PI), internal rate of return (IRR), and modified internal rate of return (MIRR). These methodologies don't necessarily give the same accept/reject decisions as NPV.

If the firm has a requirement that projects are paid back within 3 years, would the project be accepted based off the regular payback period? Why or why not? Would the project be accepted based off the discounted payback period? Why or why not?

What is the project's internal rate of return (IRR)? Based off IRR, should the project be accepted? Why or why not? Recall the project's cost of capital is 12.5%. What is the project's modified internal rate of return (MIRR)? Based off MIRR, should the project be accepted? Why or why not?

What are the advantages/disadvantages of NPV, regular payback, discounted payback, PI, IRR, and MIRR? Present these advantages/disadvantages in a table.

•Describe the purpose of the report and provide a conclusion. An introduction and a conclusion are important because many busy individuals in the business environment may only read the first and the last paragraph. If those paragraphs are not interesting, they never read the body of the paper.
•Answer the SLP Assignment question(s) clearly and provide necessary details.
•Write clearly and correctly—that is, no poor sentence structure, no spelling and grammar mistakes, and no run-on sentences.
•Provide citations to support your argument and references on a separate page. (All the sources that you listed in the references section must be cited in the paper.) Use APA format to provide citations and references.
•Type and double-space the paper.
•Whenever appropriate, please use Excel to show supporting computations in an appendix, present financial information in tables, and use the data computed to answer follow-up questions. In finance, in addition to being able to write well, it's important to present information in a professional manner and to analyze financial information. This is part of the assignment expectations and will be considered for grading purposes.

View Full Posting Details