Recommendations and Justifications | Essay
Added on 2022-08-23
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Running head: RECOMMENDATIONS AND JUSTIFICATIONS 1
Recommendations and Justifications
Student’s Name
University Affiliation
Recommendations and Justifications
Student’s Name
University Affiliation
RECOMMENDATIONS AND JUSTIFICATIONS 2
Recommendations and Justifications
Various companies use the net present value (NPV) as one of the capital budgeting
methods in their efforts to determine whether a venture is worthy of its investment. The company
in question considered NPV because of its numerous benefits. One of these benefits is that NPV
considers the time value of money (Almaktar, Rahman & Hassan, 2016). It mentions that a
shilling today is more valuable than a shilling tomorrow or in the future. Moreover, NPV takes
into consideration the entire cash inflow from the time the business commences to the time of
closure of operations (Almaktar, Rahman & Hassan, 2016). The last benefit of this capital
budgeting method is that it is the most precise method in predicting the sustainability of any
particular venture.
Based on the NPV calculations indicated in the excel templates, I would recommend the
organization to pursue project C. This is because project C yields a positive NPV. Project C
generates an NPV of 17,011 and 15,298 with the application of 5.5% and a 6% discount rate,
respectively. Therefore, project C increases the shareholders' wealth as it maximizes their
investment. Projects A and B yield a negative NPV, and as such, they would decrease the
shareholders' wealth. The shareholders may incur losses if the management undertakes either
project A or B.
Conversely, the change in discount rates caused a tremendous difference in the original
assessment. For instance, the evolution of the discount rate from 5.5% to 8% in project A caused
a decrease in the number of losses to be incurred by the investors. The losses incurred by
investors decreased from 9,275 to 6,451. The investors would lose less money when working
with a higher discount rate as compared to working with a small discount rate. In project B, a
Recommendations and Justifications
Various companies use the net present value (NPV) as one of the capital budgeting
methods in their efforts to determine whether a venture is worthy of its investment. The company
in question considered NPV because of its numerous benefits. One of these benefits is that NPV
considers the time value of money (Almaktar, Rahman & Hassan, 2016). It mentions that a
shilling today is more valuable than a shilling tomorrow or in the future. Moreover, NPV takes
into consideration the entire cash inflow from the time the business commences to the time of
closure of operations (Almaktar, Rahman & Hassan, 2016). The last benefit of this capital
budgeting method is that it is the most precise method in predicting the sustainability of any
particular venture.
Based on the NPV calculations indicated in the excel templates, I would recommend the
organization to pursue project C. This is because project C yields a positive NPV. Project C
generates an NPV of 17,011 and 15,298 with the application of 5.5% and a 6% discount rate,
respectively. Therefore, project C increases the shareholders' wealth as it maximizes their
investment. Projects A and B yield a negative NPV, and as such, they would decrease the
shareholders' wealth. The shareholders may incur losses if the management undertakes either
project A or B.
Conversely, the change in discount rates caused a tremendous difference in the original
assessment. For instance, the evolution of the discount rate from 5.5% to 8% in project A caused
a decrease in the number of losses to be incurred by the investors. The losses incurred by
investors decreased from 9,275 to 6,451. The investors would lose less money when working
with a higher discount rate as compared to working with a small discount rate. In project B, a
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