Capital Budgeting Techniques: CQU Printers Replacement Decision Report

This report provides a comprehensive capital budgeting analysis for CQU Printers, evaluating the replacement of an existing printer with two alternative models (Printer A and Printer B). The analysis employs several key capital budgeting techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), and discounted payback period, to determine the most financially viable option. The report begins with an executive summary and introduction, followed by detailed calculations of initial investment, operating cash flows, and terminal cash flows for each printer option. The core of the report involves the application of the capital budgeting techniques, with detailed workings and tables to demonstrate the calculations and results for each method. NPV and IRR graphs are also included to visually represent the project's profitability. The report concludes with a comparison of the results, a recommendation based on risk and return factors, and a discussion of the implications of unlimited funds and capital rationing. The findings show that Printer B is the superior investment based on the analysis. The report includes references to support the financial concepts used.

Running Head: Capital Budgeting Techniques
CAPITAL INVESTMENT APPRAISAL

Capital Budgeting Techniques 1
Table of Contents
Executive Summary.............................................................................................................................2
Introduction.........................................................................................................................................3
PART A................................................................................................................................................3
1. Initial investment.....................................................................................................................3
2) Operating cash flows:..............................................................................................................5
3) Terminal cash flows.................................................................................................................7
PART B................................................................................................................................................8
Cash Flow Streams..........................................................................................................................8
PART C................................................................................................................................................9
1. Discounted payback period.....................................................................................................9
2. Net Present Value..................................................................................................................10
3. Internal Rate of Return.........................................................................................................11
PART D..............................................................................................................................................12
NPV Graph....................................................................................................................................13
IRR Graph.....................................................................................................................................13
PART E..............................................................................................................................................13
NPV and IRR results.....................................................................................................................13
PART E..............................................................................................................................................14
Unlimited funds.............................................................................................................................14
Capital Rationing...........................................................................................................................14
PART F..............................................................................................................................................15
Recommendations based on risk and return factor....................................................................15
Conclusion..........................................................................................................................................15
References..........................................................................................................................................17

Capital Budgeting Techniques 2
Executive 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 preferred
over 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 Techniques 3
Introduction:
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 A
1. Initial investment
Determination 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)

Capital Budgeting Techniques 4
Working Notes:
1. Old printer details
Old Printer Amounts
Cost $ 4,00,000.00
Residual value at the end of 5th
year $ 1,50,000.00
Useful Life 5 years
Depreciation as per SLM $ 50,000.00
Carrying amount at the end of 3rd
Year $ 2,50,000.00
Recoverable price at the end of
3rd year $ 4,20,000.00
Capital Gain $ 1,70,000.00
2. Initial investment
New Printer A
Cost $ 8,30,000.00
Installation cost $ 40,000.00
Total Cost $ 8,70,000.00
Less: Inflow from Old printer $ 4,20,000.00
Net capital investment $ 4,50,000.00
Cost of asset $ 8,70,000.00
Residual value at the end of 5th
year $ 4,00,000.00
Useful Life 5 years
Depreciation as per SLM $ 1,65,300.00
Depreciation = Total cost of asset- Residual value
Useful life
= 870000-43500
5
= $ 165300
New Printer B
Cost $ 6,40,000.00
Installation cost $ 20,000.00
Total Cost $ 6,60,000.00
Less: Inflow from Old printer $ 4,20,000.00

Capital Budgeting Techniques 5
Net capital investment $ 2,40,000.00
Cost of asset $ 6,60,000.00
Residual value at the end of 5th
year $ 3,30,000.00
Useful Life 5 years
Depreciation as per SLM $ 1,25,400.00
Depreciation= 660000-33000
5
= $125400
2) Operating cash flows:
Determination of operating cash flows of the firm of replacement printers:
Operating cash flows are the cash movement in and out of business due to the operating
activities of business of the firm. The incremental cash flows will be determined in the
present case as replacement decision has to be made in regards to new printer in place of new
printers.
Incremental cash flows= Cash flows of printer A minus Cash flows of old printer
Note= Cash flows are to be taken as net of depreciation.
Printer A
Year
Increment
al Cash
Flows( v-
iv)
Tax
@30%
Cash flows
after tax
Incrementa
l
Depreciatio
n
(i-ii)
Total cash
flows
0
$ -
90,400.00
1
$
14,700.00
$
4,410.00
$
10,290.00
$
1,15,300.00
$
1,25,590.00
2
$
34,700.00
$
10,410.0
0
$
24,290.00
$
1,15,300.00
$
1,39,590.00
3
$
64,700.00
$
19,410.0
0
$
45,290.00
$
1,15,300.00
$
1,60,590.00

Capital Budgeting Techniques 6
4
$
94,700.00
$
28,410.0
0
$
66,290.00
$
1,15,300.00
$
1,81,590.00
5
$
1,34,700.00
$
40,410.0
0
$
94,290.00
$
1,15,300.00
$
2,09,590.00
Net
operatin
g cash
flows
$
7,26,550.00
Printer B
Year
Increment
al Cash
Flows (vi-
iv)
Tax
@30%
Cash
flows
after tax
Incrementa
l
Depreciatio
n (iii-i)
Total cash
flows
0
$
-
1
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
2
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
3
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
4
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
5
$
14,600.00
$
4,380.0
0
$
10,220.00
$
75,400.00
$
85,620.00
Net
operatin
g cash
flows
$
4,28,100.00
Workings:
Changes in cash balance due to operating activities at year 0:
Decrease in current assets
Inventories $ 20,000.00
Increase in current

Capital Budgeting Techniques 7
liabilities
Accounts Payable $ 35,000.00
Increase in current assets
Cash $ -25,400.00
Accounts Receivables $ -1,20,000.00
Decrease in current
liabilities $ -
operating cash flows in
year 0 $ -90,400.00
Old Printer
Yea
r EBDT (A)
Depreciation
(B)(i)
EBT (A-B)
(iv)
1 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
2 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
3 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
4 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
5 $ 1,20,000.00 $ 50,000.00 $ 70,000.00
New Printer
Yea
r EBDT (A)
Depreciation
(B)
(ii)
EBT (A-B)
(v)
1 $ 2,50,000.00
$
1,65,300.00 $ 84,700.00
2 $ 2,70,000.00
$
1,65,300.00 $ 1,04,700.00
3 $ 3,00,000.00
$
1,65,300.00 $ 1,34,700.00
4 $ 3,30,000.00
$
1,65,300.00 $ 1,64,700.00
5 $ 3,70,000.00
$
1,65,300.00 $ 2,04,700.00
New Printer B
Year EBDT (A)
Depreciation
(B)(iii)
EBT (A-B)
(vi)
1 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00

Capital Budgeting Techniques 8
2 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
3 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
4 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
5 $ 2,10,000.00 $ 1,25,400.00 $ 84,600.00
3) Terminal cash flows
Terminal cash flows are those cash flows that occurs in the last year of asset’s useful life and
these are different from normal operating cash flows of business. In the last year the company
will be selling the Printer A at $ 400000 or if Printer B is chosen, then it will be sold at
$330000. No capital gain tax is imposed on such transaction as per the requirements of case.
Particular PRINTER A PRINTER B
Salvage value
$
4,00,000.00 $ 3,30,000.00
Book Value
$
43,500.00 $ 33,000.00
Capital Gain
$
3,56,500.00 $ 2,97,000.00
PART B
Cash Flow Streams
Cash flow stream of any asset is the estimated values possible cash flows during the asset’s
useful life. It included both inflow and outflows of cash associated with the asset. All the cash
flows related to the printer possessed by the firm will be covered while determining its cash
flow stream from its acquisition till the end of its useful life (Dyson & Berry, 2014). Hence it
will include the net initial investment, operating cash flows and the terminal cash flows from
the replacement printers.
Printer A
Ye
ar
Initial
Investm
ent
Changes
in cash
balance
Increme
ntal
CFATS
Termin
al Cash
flows
Total
cash
flows
PV
F
Present
value of
cash
flows
0
$ -
4,50,000
.00
$
-
90,400.00
$ -
5,40,400
.00
1.00
0
$ -
5,40,400
.00
1 $ $ 0.87 $

Capital Budgeting Techniques 9
1,25,590.
00
1,25,590
.00 7
1,10,166
.67
2
$
1,39,590.
00
$
1,39,590
.00
0.76
9
$
1,07,409
.97
3
$
1,60,590.
00
$
1,60,590
.00
0.67
5
$
1,08,393
.68
4
$
1,81,590.
00
$
1,81,590
.00
0.59
2
$
1,07,515
.86
5
$
2,09,590.
00
$
3,56,500
.00
$
5,66,090
.00
0.51
9
$
2,94,009
.41
Printer B
Ye
ar
Initial
Investment
Incremental
CFATS
Terminal
Cash flow
Total cash
flows
PV
F
PV of
cash flows
0
$ -
2,40,000.00
$
-
$ -
2,40,000.00
1.0
00
$ -
2,40,000.0
0
1
$
85,620.00
$
85,620.00
0.8
77
$
75,105.26
2
$
85,620.00
$
85,620.00
0.7
69
$
65,881.81
3
$
85,620.00
$
85,620.00
0.6
75
$
57,791.06
4
$
85,620.00
$
85,620.00
0.5
92
$
50,693.91
5
$
85,620.00
$
2,97,000.00
$
3,82,620.00
0.5
19
$
1,98,720.8
4
PART C
1. Discounted payback period
Whenever in the question discounting rate is give, discounted payback period is determined
as it gives more reliable results than the normal payback period. Hence, in the present case
discounted payback period will be calculated using the discounting rate of return of 14%.

Capital Budgeting Techniques 10
Payback period is the period in which the project is expected to recover its initial investment
by generating returns in the form of cash inflows (Dayananda, 2002). The project with lower
payback period is always preferred over the project which has higher payback period
(Danielson & Scott, 2006).
Printer A
Year Cash flows
PVF @
14% PV of Cash Flows
Cumulative cash
flows
0 $ -5,40,400.00 1.000 $ -5,40,400.00 $ -5,40,400.00
1 $ 1,25,590.00 0.877
$
1,10,166.67 $ -4,30,233.33
2 $ 1,39,590.00 0.769
$
1,07,409.97 $ -3,22,823.36
3 $ 1,60,590.00 0.675
$
1,08,393.68 $ -2,14,429.69
4 $ 1,81,590.00 0.592
$
1,07,515.86 $ -1,06,913.83
5 $ 2,09,590.00 0.519
$
1,08,854.48 $ 1,940.65
3.018 Years
Printer B
Year Cash flows PVF PV of Cash Flows
Cumulative cash
flows
0 $ -2,40,000.00 1.000 $ -2,40,000.00 $ -2,40,000.00
1
$
85,620.00 0.877
$
75,105.26 $ -1,64,894.74
2
$
85,620.00 0.769
$
65,881.81 $ -99,012.93
3
$
85,620.00 0.675
$
57,791.06 $ -41,221.87
4
$
85,620.00 0.592
$
50,693.91 $ 9,472.05
5
$
85,620.00 0.519
$
1,52,445.09 $ 1,61,917.14
2.19 Years
Conclusion: As per the payback period technique of capital investment, Printer B must be
accepted as it has lower payback period. Hence, it is capable of recovering its capital
investment earlier than that of Printer A.

Capital Budgeting Techniques 11
2. Net Present Value
Net present value is the most common capital budgeting technique and it gives the most
reliable results ((Truong, Partington& Peat, 2008). The application of this technique is the
simplest among all the capital investment appraisal techniques. Net present value of any
investment is the sum total of present values of all the cash flows associated with the asset.
The present value of outflows of cash is deducted from the present value of cash inflows. The
project with higher NPV is preferred over project with lower one as higher NPV shows high
profitability of the project (Alkaraan & Northcott, 2006).
PRINTER A
Year Cash flows PVF PV of Cash Flows
0 $ -5,40,400.00 1 $ -5,40,400.00
1 $ 1,25,590.00 0.877 $ 1,10,166.67
2 $ 1,39,590.00 0.769 $ 1,07,409.97
3 $ 1,60,590.00 0.675 $ 1,08,393.68
4 $ 1,81,590.00 0.592 $ 1,07,515.86
5 $ 5,66,090.00 0.519 $ 2,94,009.41
NP
V $ 1,87,095.58
PRINTER B
Year Cash flows PVF PV of Cash Flows
0 $ -2,40,000.00 1.000 $ -2,40,000.00
1 $ 85,620.00 0.877 $ 75,105.26
2 $ 85,620.00 0.769 $ 65,881.81
3 $ 85,620.00 0.675 $ 57,791.06
4 $ 85,620.00 0.592 $ 50,693.91
5 $ 3,82,620.00 0.519 $ 1,98,720.84
NP
V $ 208192.89
Conclusion: In this case Printer B has higher NPV and hence it must be selected for the
replacement purpose.