Study on Appraisal of Capital Investments
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Added on 2020-05-16
Study on Appraisal of Capital Investments
Added on 2020-05-16
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Running Head: Appraisal of Capital InvestmentsCapital Budgeting Decisions
Appraisal of Capital Investments1Executive summary:In this report, various capital budgeting techniques have been discussed and applied to reach at a conclusion regarding the decision of replacement of printers held as asset by CQU printing firm which is engaged in the business of commercial printing. The firm is considering the replacement the old printer with the new printer to improve the quality of printing and the operational efficiency. However, there are two choices of printer available in the market and the firm has to select the best suitable option on the basis of rankings given using various capital budgeting techniques such as Net present value, Payback period, Internal rate of return etc. In this report each of these capital investment proposals have been critically evaluated and it is observed that the firm must go with the option of Printer B as it has more favorable results than Printer A.
Appraisal of Capital Investments2Table of ContentsExecutive summary.....................................................................................................................................1Introduction.................................................................................................................................................3Part A..........................................................................................................................................................31.Initial investment.............................................................................................................................32.Operating cash flows.......................................................................................................................53.Terminal cash flows.........................................................................................................................7Part B...........................................................................................................................................................8Cash flow streams....................................................................................................................................8Part C.........................................................................................................................................................101.Payback Period..............................................................................................................................102.Net Present Value..........................................................................................................................113.Internal Rate of return....................................................................................................................13Part d.........................................................................................................................................................15Graphical representation of IRR profiles with NPVs.............................................................................15Part e......................................................................................................................................................17i.Conflicts of results.....................................................................................................................17ii.Decision making under the different situations..........................................................................17Part f..........................................................................................................................................................18Conclusion.................................................................................................................................................19References.................................................................................................................................................20Appendices................................................................................................................................................22
Appraisal of Capital Investments3Introduction:Capital budgeting is the most important part of financial management as it involves evaluation ofdecisions regarding the capital investment in any business or project. As a large sum of capital funds of the firm is investment in these decisions for generally longer terms and it is not easily possible to reverse the decision once made, such decisions are required to be made after assessing all the potential benefits and risks involved in the possible investment plans. To evaluate each proposal of capital investment the project or business managers must use various techniques of capital budgeting such as Net present value, Payback period or Internal rate of return etc. In the instant case of CQU Printers, the firm has to critically evaluate the replacement decision and the year in which such decision must be implemented. Also, the firm has to select the most appropriate investment option between Printer A or Printer B so as to increase its profitability with the efficient utilization of resources available with it. Part A1.Initial investment:Initial investment is the deployment of capital funds in the acquisition and installation of an assetto the business or to undertake any project. It is made in the base year. In the given case, the firmis selling the old printer and the value realized on its sale will be deducted from the cost of new printer. Cost of new printer will include both the acquisition and installation cost (Correia &
Appraisal of Capital Investments4Cramer, 2008). The initial investment required to be made in the replacement printers are determined below.Printer A Cost of Printer $ 830,000.00 Add: Installation cost $ 40,000.00 Total Cost $ 870,000.00 Less: Inflow from sale of old printer $ 420,000.00 Net capital investment $ 450,000.00 Printer B Cost of Printer B $ 640,000.00 Add: Installation cost $ 20,000.00 Total Cost $ 660,000.00 Less: Inflow from sale of old printer $ 420,000.00 Net capital investment $ 240,000.00
Appraisal of Capital Investments52.Operating cash flows:Operating cash flows associated with any asset or business covers both inflow as well as outflow of cash from the normal operations of the business. In this case, the profits earned by the firm with the use printers are taken as operating cash flows (Danielson & Scott, 2006). The operating cash flows of replacement printers are calculated following the incremental approach where the profits before depreciation and depreciation.Refer AppendicesPRINTER AYearCash Flows Of Printer ACash FlowsOf Old PrinterIncremental Cash FlowsTax @30%Cash Flows After Tax Depreciation Total Cash Flows 0($90,400.00)0 $ -90,400.00 $ -90,400.00 $ -90,400.00 1 $ 84,700.00 $ 70,000.00 $ 14,700.00 $ 4,410.00 $ 10,290.00 $ 115,300.00 $ 125,590.00 2 $ 104,700.00 $ 70,000.00 $ 34,700.00 $ 10,410.00 $ 24,290.00 $ 115,300.00 $ 139,590.00 3 $ 134,700.00 $ 70,000.00 $ 64,700.00 $ 19,410.00 $ 45,290.00 $ 115,300.00 $ 160,590.00 4 $ 164,700.00 $ 70,000.00 $ 94,700.00 $ 28,410.0 $ 66,290.00 $ 115,300. $ 181,590.0
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