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Capital Budgeting Analysis for Printer Investment

   

Added on  2020-05-28

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Running Head: Capital Budgeting TechniquesCAPITAL INVESTMENT APPRAISAL
Capital Budgeting Analysis for Printer Investment_1

Capital Budgeting Techniques1Table of ContentsExecutive Summary.............................................................................................................................2Introduction.........................................................................................................................................3PART A................................................................................................................................................31.Initial investment.....................................................................................................................32)Operating cash flows:..............................................................................................................53)Terminal cash flows.................................................................................................................7PART B................................................................................................................................................8Cash Flow Streams..........................................................................................................................8PART C................................................................................................................................................91.Discounted payback period.....................................................................................................92.Net Present Value..................................................................................................................103.Internal Rate of Return.........................................................................................................11PART D..............................................................................................................................................12NPV Graph....................................................................................................................................13IRR Graph.....................................................................................................................................13PART E..............................................................................................................................................13NPV and IRR results.....................................................................................................................13PART E..............................................................................................................................................14Unlimited funds.............................................................................................................................14Capital Rationing...........................................................................................................................14PART F..............................................................................................................................................15Recommendations based on risk and return factor....................................................................15Conclusion..........................................................................................................................................15References..........................................................................................................................................17
Capital Budgeting Analysis for Printer Investment_2

Capital Budgeting Techniques2Executive 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 preferredover 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 Analysis for Printer Investment_3

Capital Budgeting Techniques3Introduction: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 A1.Initial investmentDetermination 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)
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