Capital Budgeting Report: Investment Project Analysis and Evaluation

This report provides a comprehensive analysis of capital budgeting, a critical tool for investment firms and companies to assess project viability. It explores various investment evaluation methods, including Net Present Value (NPV), Internal Rate of Return (IRR), payback period, and discounted payback period, emphasizing their roles in determining project profitability and financial feasibility. The report applies these tools to analyze the Berry Mount Manufactures project, calculating an NPV of $1,624,437, an IRR of 17%, a payback period of 3.49 years, and a discounted payback period of 4.29 years. These results indicate the project's financial viability, potential for shareholder wealth creation, and overall positive investment prospects. The report also highlights the importance of sensitivity and scenario analyses in risk assessment and forecasting, advocating for investment projects that aim to maximize shareholder wealth.

Running head: CAPITAL BUDGETING
Capital Budgeting
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Table of Contents
Capital Budgeting............................................................................................................................2
Investment Project Analysis............................................................................................................5
Reference.........................................................................................................................................7

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Capital Budgeting
The capital budgeting is an important basement tool that is applied by the investment
firms and companies for the assessment of the viability of the project. The capital budgeting is
the key tool that is applied by the management of the company for the purpose of the evaluation
of the various investment project of the companies (Wnuk-Pel, 2014). The different investment
tools such as the net present value, internal rate of return and the payback period of the project
could well address the viability and visibility of the project. The aim of the investment project is
to assess the viability in terms of the viability of the project and the return the project would be
generating from the same. Corporate investment decision making is based on various
assumptions and forecasts that are applied by the management of the company for the purpose of
the investment. The required rate of return from a project is evaluated after assessing the project
based on the risk and return provided by the project and other various aspects that can
significantly affect the profitability and return from the project (Pfeiffer et al. 2016).
Return and sustainability of the investment project are the two key aspects of a capital
budgeting and the same should be taken into consideration while evaluating the project. The
application of various factors and approaches like sensitivity analysis and scenario analysis can
help the company in the evaluation of the viability of the project at various stages (Chittenden &
Derregia, 2015). Risk assessment plays a crucial role in the overall development of the project.
Different investment tools are applied in the context of evaluation of the project as each method
has its own merits and demerits and inclusion of various factors and approaches will guide the
company in the overall development and sustainability of the project (Kengatharan, 2016).

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Sensitivity Analysis: The sensitivity analysis shows the key factors that are associated with the
company and the change in the final output of the investment project if the key factor for the
investment project changes (Burns & Walker, 2015). Sensitivity analysis is a key factor that is
considered by the company for assessing the overall changes when the key factors of the project
like discount rate, cash flows and the level of interest rate changes in the project. Assessment of
changes in these factors and the value of final output can be well linked on an overall basis for
the company. Investment manager should apply the concepts of the various investment tools so
that they can assess the same thereby analysing the viability and success of the project in terms
of return and risk.
Scenario Analysis: The scenario analysis shows the changes in the key factors and various
scenarios that should be incorporated for the company. Scenario analysis shows the changing
profitability, interest rate and various other key factors of the company that can significantly
influence the operations of the company. The scenario analysis reflects the changing business
condition and output of the same after the inclusion of the various business conditions and
factors that were taken into consideration. The scenario analysis of the company could well
indicate the viability and success of the company in terms of the operations of the company and
viability (Santos et al. 2014).
Net Present Value: The net present value of the company shows the profitability of the project
in terms of the assessment and viability of the project. The net present value of the project shows
the assessment of the project and the return generated in terms of the cash inflows of the project.
The NPV is considered a key measure for the evaluation of the profitability of the project as the
same considers the concept of shareholder’s wealth maximisation concept.

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Internal Rate of Return: The internal rate of return shows the assessment of the project in
terms of the percentage. The return generated by the project and the overall feasibility of the
project. The internal rate of return is a key measure that is applied by the management of the
company for the purpose of comparison.
Crucial factors depending on the investment project like timing of the cash flows and the
size of the cash inflows from the project is also a key factor that should be taken into
consideration for the purpose of the analysis of the company. Application of key investment
tools like payback period and discounted payback period can be applied by the company for the
purpose of the analysis of the recovery of the total invested cash flows. Risk is of uncertain
nature and the timing of the cash flows and the return on investment may vary depending on
certain factors which are directly attributed to the project. Application of risk assessment tools
like scenario analysis and sensitivity analysis in the investment project can help the company in
forecasting the various scenarios which the company can face and the expected result from the
same. Forecasting and planning is an efficient way of implementing management strategies that
can help the organisations and institutions in better handling of various situations and hurdles
faced by the company.
Thus it is important that the investment projects selected by the company aims at
maximising the wealth of the shareholder. Risk and return is also an important factor that should
be assessed for the investment project and the same should be compared in contrast to the overall
belief of the management.

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Investment Project Analysis
The analysis of the Berry Mount Manufactures can be done on the basis of the several
investment assessment tools which were applied for assessing the financial feasibility and
viability of the project. The key investment tools that were applied for the investment project for
the purpose of investment consideration and evaluation of the profitability of the project were the
Net Present value, internal rate of return, payback period and discounted payback period of the
project.
The net present value of the project that was determined for the project and the same was
around $1,624,437 for the project. The net present value is greater than zero indicating that the
project is financially viable for the purpose of the investment. Acceptance of the investment
project will lead to the shareholder’s wealth creation (Rich & Rose, 2014). The management of
the company should evaluate other key factors that shows us the various aspect of the condition
and the viability of the project. The internal rate of return shows the amount of return generated
by the project in terms of percentage. The IRR of the project was around 17% this shows that the
investment project would be yielding an all total of 17% of return on the initial capital invested.
The internal rate of return from the project is much higher than the required rate of return from
the project.
Payback Period shows the recovery of the initial investment of project in the form of cash
inflows over the life of the project. The payback period for the project was around 3.49 years
reflecting that the company will be able to recover the initial set of amount in the given frame.
The discounted payback period is more classified way of calculating and evaluating the recovery
of the initial amount as the same considers the discount rate for evaluating the discounted cash

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flow received from the investment project (Daunfeldt & Hartwig, 2014). The discounted cash
flow from the project was around 4.29 years reflecting the company will be able to recover the
initial set of investments in the given time frame.
Year
Total Cash
Inflows/(Outflows)
Cumulative Cash
Flow
Discount
Rate
Discounted Cash
Flow
Cumulative
DCF
0 -8000000 -8000000 10% -8000000 -8000000
1 1954000 -6046000 10% 1776363.636 -6223636.364
2 2216500 -3829500 10% 1831818.182 -4391818.182
3 2479000 -1350500 10% 1862509.391 -2529308.79
4 2741500 1391000 10% 1872481.388 -656827.4025
5 3674000 5065000 10% 2281264.941 1624437.538
Investment Results/Output
Payback Period 3.49
Discounted Payback Period 4.29
Net Present Value 1624437.54
Internal Rate of Return (IRR) 17%
Thus, from the above analysis and the results from the investment project shows that the project
should be accepted so that the same creates values for the shareholders of the company.

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Reference
Burns, R., & Walker, J. (2015). Capital budgeting surveys: the future is now.
Chittenden, F., & Derregia, M. (2015). Uncertainty, irreversibility and the use of ‘rules of
thumb’in capital budgeting. The British Accounting Review, 47(3), 225-236.
Daunfeldt, S. O., & Hartwig, F. (2014). What determines the use of capital budgeting methods?:
Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4), 101-
112.
Kengatharan, L. (2016). Capital budgeting theory and practice: a review and agenda for future
research. Applied Economics and Finance, 3(2), 15-38.
Pfeiffer, A., Millar, R., Hepburn, C., & Beinhocker, E. (2016). The ‘2 C capital stock’for
electricity generation: Committed cumulative carbon emissions from the electricity
generation sector and the transition to a green economy. Applied Energy, 179, 1395-1408.
Rich, S. P., & Rose, J. T. (2014). Re-examining an old question: Does the IRR method implicitly
assume a reinvestment rate?. Journal of Financial Education, 152-166.
Santos, L., Soares, I., Mendes, C., & Ferreira, P. (2014). Real options versus traditional methods
to assess renewable energy projects. Renewable Energy, 68, 588-594.
Wnuk-Pel, T. (2014). The practice and factors determining the selection of capital budgeting
methods–evidence from the field. Procedia-Social and Behavioral Sciences, 156, 612-
616.