Capital Budgeting Analysis for Printer Investment

This assignment focuses on evaluating two investment options for a firm: purchasing Printer A or Printer B. It utilizes various capital budgeting techniques such as the payback period, net present value (NPV), and internal rate of return (IRR) to determine the most financially sound decision. The analysis also considers the replacement of an old printer with a new one, highlighting the importance of strategic capital investment decisions.

Running Head: Capital Budgeting Techniques
CAPITAL INVESTMENT APPRAISAL

Capital Budgeting Techniques 1
Table of Contents
Executive Summary.............................................................................................................................2
Introduction.........................................................................................................................................3
PART A................................................................................................................................................3
1. Initial investment.....................................................................................................................3
2) Operating cash flows:..............................................................................................................5
3) Terminal cash flows.................................................................................................................7
PART B................................................................................................................................................8
Cash Flow Streams..........................................................................................................................8
PART C................................................................................................................................................9
1. Discounted payback period.....................................................................................................9
2. Net Present Value..................................................................................................................10
3. Internal Rate of Return.........................................................................................................11
PART D..............................................................................................................................................12
NPV Graph....................................................................................................................................13
IRR Graph.....................................................................................................................................13
PART E..............................................................................................................................................13
NPV and IRR results.....................................................................................................................13
PART E..............................................................................................................................................14
Unlimited funds.............................................................................................................................14
Capital Rationing...........................................................................................................................14
PART F..............................................................................................................................................15
Recommendations based on risk and return factor....................................................................15
Conclusion..........................................................................................................................................15
References..........................................................................................................................................17

Capital Budgeting Techniques 2
Executive Summary:
In this report, the replacement decision regarding the printer carried as an asset by CQU
Printers is evaluated using various capital budgeting techniques viz. Net present value,
internal rate of return, payback period. The NPV of printer A as well as printer B is positive
but the NPV of printer A is lower than that of printer B. Therefore, printer B will be preferred
over printer A.IRR of printer A is also lower than that of printer B hence printer B is
preferred over A on the basis of IRR. The cash flows associated with the printers are
determined on the basis of differential amount of cash flows of old printer and new printer.
The graphical representation of NPV and IRR is also undertaken in this report to make it
easily understandable to the readers.

Capital Budgeting Techniques 3
Introduction:
CQU Printers is a printing firm and hence it holds printers as its assets. With the old printer
the company is facing some issues regarding the quality of printing and its costs inefficiency
hence it is considering the decision of replacing it with another printer. There are two options
available with the firm to invest in for the purpose of replacing the old printer. The firm can
either purchase new printer A or printer B. To evaluate both the proposals different capital
investment appraisal techniques will be applied. The inflow from sale of old printer will be
adjusted from the initial investment made in the purchase of new printer.
Capital budgeting techniques are those financial tools that helps the managers in their
decision making regarding the capital investments to be made to earn maximum profitability
with minimum deployment of financial and non-financial resources. Whenever, the choice
between the two possible alternative investments is available, the firm must rank those
alternative plans on various basis such as Net present value, payback period, internal rate of
return etc.
PART A
1. Initial investment
Determination of initial investment in both the cases of replacement printers:
Initial investment involves the outflow of cash in year 0 for the acquisition and installation of
the assets in the business of the firm. In this case the initial investment will be calculated on
the net basis by adjusting the amount of cash inflow from the disposal of old printer. The tax
on capital gain on the sale of old printer is ignored as per the requirement of case question.
The initial investment in the case of Printer A will be $ 450,000 (Working Note: 2)
The initial investment in the case of Printer A will be $ 240,000 (Working Note: 3)

Capital Budgeting Techniques 4
Working Notes:
1. Old printer details
Old Printer Amounts
Cost $ 4,00,000.00
Residual value at the end of 5th
year $ 1,50,000.00
Useful Life 5 years
Depreciation as per SLM $ 50,000.00
Carrying amount at the end of 3rd
Year $ 2,50,000.00
Recoverable price at the end of
3rd year $ 4,20,000.00
Capital Gain $ 1,70,000.00
2. Initial investment
New Printer A
Cost $ 8,30,000.00
Installation cost $ 40,000.00
Total Cost $ 8,70,000.00
Less: Inflow from Old printer $ 4,20,000.00
Net capital investment $ 4,50,000.00
Cost of asset $ 8,70,000.00
Residual value at the end of 5th
year $ 4,00,000.00
Useful Life 5 years
Depreciation as per SLM $ 1,65,300.00
Depreciation = Total cost of asset- Residual value
Useful life
= 870000-43500
5
= $ 165300
New Printer B
Cost $ 6,40,000.00
Installation cost $ 20,000.00
Total Cost $ 6,60,000.00
Less: Inflow from Old printer $ 4,20,000.00

Capital Budgeting Techniques 5
Net capital investment $ 2,40,000.00
Cost of asset $ 6,60,000.00
Residual value at the end of 5th
year $ 3,30,000.00
Useful Life 5 years
Depreciation as per SLM $ 1,25,400.00
Depreciation= 660000-33000
5
= $125400
2) Operating cash flows:
Determination of operating cash flows of the firm of replacement printers:
Operating cash flows are the cash movement in and out of business due to the operating
activities of business of the firm. The incremental cash flows will be determined in the
present case as replacement decision has to be made in regards to new printer in place of new
printers.
Incremental cash flows= Cash flows of printer A minus Cash flows of old printer
Note= Cash flows are to be taken as net of depreciation.
Printer A
Year
Increment
al Cash
Flows( v-
iv)
Tax
@30%
Cash flows
after tax
Incrementa
l
Depreciatio
n
(i-ii)
Total cash
flows
0
$ -
90,400.00
1
$
14,700.00
$
4,410.00
$
10,290.00
$
1,15,300.00
$
1,25,590.00
2
$
34,700.00
$
10,410.0
0
$
24,290.00
$
1,15,300.00
$
1,39,590.00
3
$
64,700.00
$
19,410.0
0
$
45,290.00
$
1,15,300.00
$
1,60,590.00

Capital Budgeting Techniques 6
4
$
94,700.00
$
28,410.0
0
$
66,290.00
$
1,15,300.00
$
1,81,590.00
5
$
1,34,700.00
$
40,410.0
0
$
94,290.00
$
1,15,300.00
$
2,09,590.00
Net
operatin
g cash
flows
$
7,26,550.00
Printer B
Year
Increment
al Cash
Flows (vi-
iv)
Tax
@30%
Cash
flows
after tax
Incrementa
l
Depreciatio
n (iii-i)
Total cash
flows
0
$
-
1
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
2
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
3
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
4
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
5
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
Net
operatin
g cash
flows
$
4,28,100.00
Workings:
Changes in cash balance due to operating activities at year 0:
Decrease in current assets
Inventories $ 20,000.00
Increase in current

Capital Budgeting Techniques 7
liabilities
Accounts Payable $ 35,000.00
Increase in current assets
Cash $ -25,400.00
Accounts Receivables $ -1,20,000.00
Decrease in current
liabilities $ -
operating cash flows in
year 0 $ -90,400.00
Old Printer
Yea
r EBDT (A)
Depreciation
(B)(i)
EBT (A-B)
(iv)
1 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
2 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
3 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
4 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
5 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
New Printer
Yea
r EBDT (A)
Depreciation
(B)
(ii)
EBT (A-B)
(v)
1 $ 2,50,000.00
$
1,65,300.00 $ 84,700.00
2 $ 2,70,000.00
$
1,65,300.00 $ 1,04,700.00
3 $ 3,00,000.00
$
1,65,300.00 $ 1,34,700.00
4 $ 3,30,000.00
$
1,65,300.00 $ 1,64,700.00
5 $ 3,70,000.00
$
1,65,300.00 $ 2,04,700.00
New Printer B
Year EBDT (A)
Depreciation
(B)(iii)
EBT (A-B)
(vi)
1 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00

Capital Budgeting Techniques 8
2 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
3 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
4 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
5 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
3) Terminal cash flows
Terminal cash flows are those cash flows that occurs in the last year of asset’s useful life and
these are different from normal operating cash flows of business. In the last year the company
will be selling the Printer A at $ 400000 or if Printer B is chosen, then it will be sold at
$330000. No capital gain tax is imposed on such transaction as per the requirements of case.
Particular PRINTER A PRINTER B
Salvage value
$
4,00,000.00 $ 3,30,000.00
Book Value
$
43,500.00 $ 33,000.00
Capital Gain
$
3,56,500.00 $ 2,97,000.00
PART B
Cash Flow Streams
Cash flow stream of any asset is the estimated values possible cash flows during the asset’s
useful life. It included both inflow and outflows of cash associated with the asset. All the cash
flows related to the printer possessed by the firm will be covered while determining its cash
flow stream from its acquisition till the end of its useful life (Dyson & Berry, 2014). Hence it
will include the net initial investment, operating cash flows and the terminal cash flows from
the replacement printers.
Printer A
Ye
ar
Initial
Investm
ent
Changes
in cash
balance
Increme
ntal
CFATS
Termin
al Cash
flows
Total
cash
flows
PV
F
Present
value of
cash
flows
0
$ -
4,50,000
.00
$
-
90,400.00
$ -
5,40,400
.00
1.00
0
$ -
5,40,400
.00
1 $ $ 0.87 $

Capital Budgeting Techniques 9
1,25,590.
00
1,25,590
.00 7
1,10,166
.67
2
$
1,39,590.
00
$
1,39,590
.00
0.76
9
$
1,07,409
.97
3
$
1,60,590.
00
$
1,60,590
.00
0.67
5
$
1,08,393
.68
4
$
1,81,590.
00
$
1,81,590
.00
0.59
2
$
1,07,515
.86
5
$
2,09,590.
00
$
3,56,500
.00
$
5,66,090
.00
0.51
9
$
2,94,009
.41
Printer B
Ye
ar
Initial
Investment
Incremental
CFATS
Terminal
Cash flow
Total cash
flows
PV
F
PV of
cash flows
0
$ -
2,40,000.00
$
-
$ -
2,40,000.00
1.0
00
$ -
2,40,000.0
0
1
$
85,620.00
$
85,620.00
0.8
77
$
75,105.26
2
$
85,620.00
$
85,620.00
0.7
69
$
65,881.81
3
$
85,620.00
$
85,620.00
0.6
75
$
57,791.06
4
$
85,620.00
$
85,620.00
0.5
92
$
50,693.91
5
$
85,620.00
$
2,97,000.00
$
3,82,620.00
0.5
19
$
1,98,720.8
4
PART C
1. Discounted payback period
Whenever in the question discounting rate is give, discounted payback period is determined
as it gives more reliable results than the normal payback period. Hence, in the present case
discounted payback period will be calculated using the discounting rate of return of 14%.

Capital Budgeting Techniques 10
Payback period is the period in which the project is expected to recover its initial investment
by generating returns in the form of cash inflows (Dayananda, 2002). The project with lower
payback period is always preferred over the project which has higher payback period
(Danielson & Scott, 2006).
Printer A
Year Cash flows
PVF @
14% PV of Cash Flows
Cumulative cash
flows
0 $ -5,40,400.00 1.000 $ -5,40,400.00 $ -5,40,400.00
1 $ 1,25,590.00 0.877
$
1,10,166.67 $ -4,30,233.33
2 $ 1,39,590.00 0.769
$
1,07,409.97 $ -3,22,823.36
3 $ 1,60,590.00 0.675
$
1,08,393.68 $ -2,14,429.69
4 $ 1,81,590.00 0.592
$
1,07,515.86 $ -1,06,913.83
5 $ 2,09,590.00 0.519
$
1,08,854.48 $ 1,940.65
3.018 Years
Printer B
Year Cash flows PVF PV of Cash Flows
Cumulative cash
flows
0 $ -2,40,000.00 1.000 $ -2,40,000.00 $ -2,40,000.00
1
$
85,620.00 0.877
$
75,105.26 $ -1,64,894.74
2
$
85,620.00 0.769
$
65,881.81 $ -99,012.93
3
$
85,620.00 0.675
$
57,791.06 $ -41,221.87
4
$
85,620.00 0.592
$
50,693.91 $ 9,472.05
5
$
85,620.00 0.519
$
1,52,445.09 $ 1,61,917.14
2.19 Years
Conclusion: As per the payback period technique of capital investment, Printer B must be
accepted as it has lower payback period. Hence, it is capable of recovering its capital
investment earlier than that of Printer A.

Capital Budgeting Techniques 11
2. Net Present Value
Net present value is the most common capital budgeting technique and it gives the most
reliable results ((Truong, Partington& Peat, 2008). The application of this technique is the
simplest among all the capital investment appraisal techniques. Net present value of any
investment is the sum total of present values of all the cash flows associated with the asset.
The present value of outflows of cash is deducted from the present value of cash inflows. The
project with higher NPV is preferred over project with lower one as higher NPV shows high
profitability of the project (Alkaraan & Northcott, 2006).
PRINTER A
Year Cash flows PVF PV of Cash Flows
0 $ -5,40,400.00 1 $ -5,40,400.00
1 $ 1,25,590.00 0.877 $ 1,10,166.67
2 $ 1,39,590.00 0.769 $ 1,07,409.97
3 $ 1,60,590.00 0.675 $ 1,08,393.68
4 $ 1,81,590.00 0.592 $ 1,07,515.86
5 $ 5,66,090.00 0.519 $ 2,94,009.41
NP
V $ 1,87,095.58
PRINTER B
Year Cash flows PVF PV of Cash Flows
0 $ -2,40,000.00 1.000 $ -2,40,000.00
1 $ 85,620.00 0.877 $ 75,105.26
2 $ 85,620.00 0.769 $ 65,881.81
3 $ 85,620.00 0.675 $ 57,791.06
4 $ 85,620.00 0.592 $ 50,693.91
5 $ 3,82,620.00 0.519 $ 1,98,720.84
NP
V $ 208192.89
Conclusion: In this case Printer B has higher NPV and hence it must be selected for the
replacement purpose.

Capital Budgeting Techniques 12
3. Internal Rate of Return
Internal rate of return of any project is the rate of return at which the NPV of that project is
zero (Röhrich, 2007). The project must be accepted if its IRR is higher than the required rate
of return. However, when the firm has alternative capital investment plans it must select the
one with higher IRR.
PRINTER A
Yea
r Cash flows
0 $ -5,40,400.00
1 $ 1,25,590.00
2 $ 1,39,590.00
3 $ 1,60,590.00
4 $ 1,81,590.00
5 $ 5,66,090.00
IRR 24.40%
PRINTER B
Yea
r Cash flows
0 $ -2,40,000.00
1
$
85,620.00
2
$
85,620.00
3
$
85,620.00
4
$
85,620.00
5 $ 3,82,620.00
IRR 37.93%
Conclusion: In this case Printer B has higher NPV and hence it must be selected over Printer
A.
PART D

Capital Budgeting Techniques 13
The Net present values and internal rate of return of both the investment option is plotted on
the graph as graphical representation of any data or information makes it easier to understand
and interpret it.
NPV Graph
1
$175,000.00
$180,000.00
$185,000.00
$190,000.00
$195,000.00
$200,000.00
$205,000.00
$210,000.00
$187,095.58
208192.89
NPV profile
IRR Graph
1
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
24.40%
37.93%
irr profile
Axis Title
IRR RATES

Capital Budgeting Techniques 14
PART E
NPV and IRR results
The net present value of an asset is the aggregate of present values of all the estimated cash
flows. Higher the NPV better is the capital investment decision (Bierman & Smidt, 2012). In
this case printer A has lower NPV than that of printer B. Hence investment in printer B is
more profitable (Bennouna, Meredith & Marchant, 2010).
IRR must be more than the cost of capital of the capital investment and in this case the cost of
capital is 14%. But printer B has higher IRR than printer A (Drake, 2006). So, both the
techniques of capital investment appraisal are recommending selection of printer B as the
replacement of old printer. There is no conflict in the results of both the techniques. As per
the results of both the techniques Printer B is ranked first and it must be selected by the firm
to bring the desired improvements in the business operations.
PART E
Unlimited funds
The quantum of available funds influences the investments decisions of the company. If the
company has unlimited funds its capital investment decision becomes simplified as projects
with higher return potential will be chosen for the investment (Graham & Harvey, 2002). In
such case the company can invest in the project which entails higher profitability irrespective
of the funds required to be invested in such asset as there is no lack of funds with the
company. Therefore, the firm can invest in both the new printers as it does not have any
scarcity of funds and bringing both the Printers will enhance the operational capacity of firm
and thereby it will provide higher returns to the business.
Capital Rationing
It is the situation where the firm has limited amount of funds available with it for the capital
investments but the requirement of funds is more than the availability of funds. In such a case
the company will have to rank the potential projects plans on the basis of their respective

Capital Budgeting Techniques 15
NPVs or IRRs (Brijlal, 2008). Then it will have to select one of the projects which has higher
rank as it will offer higher returns. The ranking is also sometimes done on the basis of risks
rates (Kahraman, 2001). Therefore on the basis of NPV and IRR printer B has a higher rank
and it must be accepted.
PART F
Recommendations based on risk and return factor
As a general rule of finance, to generate higher returns on the investments, higher risk must
be accepted for that plan. Investment providing fluctuating returns can offer higher returns
than the investment with uniform returns. However, at the same time higher risk is involved
in those investments due to uncertainty of cash flows (Gitman, Joehnk, Smart & Juchau,
2015). But there is lesser risk in the investments which have an approach of providing
constant returns as returns are already pre-determined in such cases. The cash flows
associated with printer A are fluctuating and hence there is higher risk involved in it due to
higher return potential. In the project B the expected returns associated with printer are
uniform and therefore there is less risk involved due to less return potential of the printer. If
the company has a capacity of bearing higher risk it must select the investment proposal in
printer A as it will offer higher return due to higher risk involved in it with the uncertainties
of quantum of cash flows (Herbst, 2003). But if the company cannot tolerate higher risk then
it must accept the investment in printer B as it will have uniform cash flows (Gitman, Juchau
& Flanagan, 2015).
Conclusion:
From the above study, it is clear that capital investments are generally one time investment
which involves deployment huge amount of financial resources. Hence such investments
requires critical decision making before selecting any investment or project plans. These

Capital Budgeting Techniques 16
investment plans entails returns and risks and such factors must be typically analysed using
the capital budgeting techniques. In the present case, it is observed that Investment in Printer
B would be more beneficial for the firm than investment in Printer A. Also, the replacement
decision of old printer with a new one is also proved to be appropriate from the above
analysis.

Capital Budgeting Techniques 17
References:
Alkaraan, F., & Northcott, D. (2006). Strategic capital investment decision-making: A role
for emergent analysis tools?: A study of practice in large UK manufacturing
companies. The British Accounting Review, 38(2), 149-173.
Bennouna, K., Meredith, G. G., &Marchant, T. (2010). Improved capital budgeting decision
making: evidence from Canada. Management decision, 48(2), 225-247.
BiermanJr, H., &Smidt, S. (2012). The capital budgeting decision: economic analysis of
investment projects. Routledge.
Brijlal, P. (2008). The use of capital budgeting techniques in businesses: A perspective from
the Western Cape.
Danielson, M. G., & Scott, J. A. (2006). The capital budgeting decisions of small
businesses. Journal of Applied Finance, 16(2), 45.
Dayananda, D. (2002). Capital budgeting: financial appraisal of investment projects.
Cambridge University Press.
Drake, P. P. Capital budgeting techniques. Online (datum poslednírevize: 29.6. 2006): www.
fau. edu/~ ppeter/fin3403/module6/capbudtech. pdf.
Dyson, R. G., & Berry, R. H. (2014). Capital investment appraisal. Developments in
Operational Research: Frontiers of Operational Research and Applied Systems Analysis,
59.
Gitman, L. J., Joehnk, M. D., Smart, S., & Juchau, R. H. (2015). Fundamentals of investing.
Pearson Higher Education AU.