Assignment on Capital Budgeting Analysis

   

Added on  2020-04-07

4 Pages874 Words68 Views
[TYPE THE COMPANY NAME]Capital BudgetingAnalysisI-KNOWIT Technologies
Assignment on Capital Budgeting Analysis_1
I-KNOWIT Technologies wants to invest 100 million in equipment which will help in production of innovative RFID blocking pads for wireless credit card protection. The company has estimated the various cash flows associated with the project and expects the project to continue for 10 years due to the constantly changing technology.A capital budgeting analysis was conducted to evaluate if the project is profitable and if the company should undertake the investment. The capital budgeting techniques like NPV, IRR and payback period were used in the analysis. Also the result of the analysis if the equipment would be financed by loan was done and the results are discussed hereafter.The various assumptions taken for the analysis are discussed below:a) The working capital is recovered at the end of the periodb) The cost of feasibility study of $1,000,000 and the research and development costs of $15 million have not been taken into consideration as these are sunk costs and will not affect the cash flows of the project.c) The loss of rent has been considered as the opportunity cost and is taken to be tax deductible.d) The depreciation has been calculated on the straight line basis and the complete cost of equipment has been depreciated over the period of 10 years.e) The cost of borrowing of 25% has been considered to be fixed cost to be incurred every year for 10 years and the loan amount is repaid at the end of 10 years.On the basis of the above assumptions, a table of incremental cash flows was prepared (in theannexure). The results of the various techniques of capital budgeting analysis are discussed below:a) Payback periodYearNet cash flowCumulative cash flows0-$10,30,00,000-$10,30,00,0001$1,56,00,000-$8,74,00,0002$1,56,00,000-$7,18,00,0003$1,56,00,000-$5,62,00,0004$1,70,00,000-$3,92,00,0005$1,85,40,000-$2,06,60,000
Assignment on Capital Budgeting Analysis_2

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