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Capital Budgeting Assignment Sample

Added on - 14 Jun 2021

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MEMORANDUMFrom:STUDENT NAMEDear SirThis memo relates to the analysis of the new project using suitable capital budgetingtechniques. The key explanations and assumptions related to the new project are outlinedbelow.1)The fees paid to the consultant for market analysis to the tune of $ 25,000 has not beenconsidered for the project cash flow estimation as this cot is a sunk cost. This is because ithas already been incurred and hence cannot be prevented (Damodaran, 2015).2)Since the current building would be used, hence there would be a loss of rent incomewhich would have to be taken as the opportunity cost and has been reflected in the capitalbudgeting analysis (Northington, 2015).3)The annual depreciation on plant and equipment is $ 3 million annually consideringstraight line depreciation and zero salvage value which implies that at t=5, the book valueof plant and equipment would be zero.4)The investment in working capital would be done at the beginning of the project i.e. at t=0.5)Further, it has been assumed that all the project cashflows would arise at the end of theyear only and discounting has been carried out considering this.In order to evaluate the project at hand, the first aspect is to estimate the incremental cashflows that are expected to arise from the proposed project in wake of the project informationthat has been estimated. These are highlighted below.
Using the above cash flows from the project, the various capital budgeting techniques need tobe applied in order to enable reaching a recommendation for the given project.1)NPV or Net Present ValueUsing the computed incremental project cash flows and the discount rate of 10%, the NPV Iscomputed below.Hence, it is apparent from the above computations that NPV for project is $ 4.21 million.2)IRR or Internal Rate of ReturnUsing the computed incremental project cash flows, the IRR Is computed with the aid of thefollowing table (Brealey, Myers and Allen, 2014).The IRR for the given project has come out as 21.13% p.a.3)Payback Period
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