Business Finance Report on Capital Budgeting Techniques for Booli Electronics

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Business Finance
Report
5/24/2018
Student Name

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Contents
Introduction...........................................................................................................................................2
Questions...............................................................................................................................................2
Q1......................................................................................................................................................2
Q2......................................................................................................................................................2
Q3......................................................................................................................................................3
Q4......................................................................................................................................................3
Q5......................................................................................................................................................4
Q6......................................................................................................................................................5
Q7......................................................................................................................................................5
Q8......................................................................................................................................................6
Conclusion.............................................................................................................................................6
References.............................................................................................................................................7
Appendices............................................................................................................................................9
Appendix 1.........................................................................................................................................9
Appendix 2.........................................................................................................................................9
Appendix 3.........................................................................................................................................9
Appendix 4.......................................................................................................................................10

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Introduction
The report highlights the fact related to the Booli Electronics. The business is going to
diversify its activities to have a large market share by using some innovation in its strategy.
The report discusses the fact and figures whether the business should expand or not. The
report focuses on the various techniques of capital budgeting to know whether the proposal is
accepted or not. The business decisions based on the capital budgeting techniques are used in
the report. The project acceptance and rejection are based on the cost and profitability of the
project (Sayadi, Tavassoli, Monjezi and Rezaei, 2014). The Booli electronics have to decide
whether to go for the new introduction of product or not. The Booli Company profitability,
payback period, internal rate of return is discussed in the report.
Questions
Q1
Non-discounted payback period
The non-discounted payback period can be defined as the period in which the time value of
money has been ignored. This technique assumes that there will be no revenues after the
project is completed (Peng and Yang, 2013). In the case of Booli electronic, the payback
period comes out to be 1.7 years (Refer Appendix 1). This indicates that the company can
recover its capital in years and 7 months only.
Q2.
Profitability Index
Profitability index can be defined as the index which shows the profit earning capacity of the
business. If the profitability index is more than 1 then the project will be accepted and if it

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comes out to be less than 1 then the proposal is rejected (Brunzell, Liljeblom and Vaihekoski,
2013).
Profitability Index = Present value of Future cash flow
Initial Investment
OR
= (NPV+ initial investment)/Initial investment
Net present value is directly related to the maximizing the wealth and earnings of the
business (Faccio, Marchica and Mura, 2016). The profitability index comes out to be
2.78(Refer Appendix 2) which is greater than 1. The project should be accepted as it is
greater than 1.
Q3.
IRR of the project
Internal Rate of return is the rate at which the business calculates its returns. This rate will not
be influenced by the external factors. The acceptance criterion for IRR is that if the internal
rate of return is come out to be more than the cost of capital then the proposal will be
accepted otherwise rejected (Rossi, 2014). In Booli Company, the IRR comes out to be ----
which is more than the cost of capital. The Internal rate of return comes out to be 54.21%
(Refer Appendix 3) which is much more than the cost of capital of the company. According
to the criterion, the project should be accepted by the Booli Electronics.
Q4.
NPV of the project