Capital Budgeting Case Paper
Capital Budgeting Case
Theresa Cruz, Jesika Watson, Sophina Lane
QRB/501
March 30, 2015
Melinda Gregg
Capital Budgeting Case
Analyzing the Results
In the two capital budgeting cases corporations (A and B) have different revenues values and expenses as well as variable depreciation expenses, tax rates and discount rates. The members of our team had to compute both corporate cases NVP, IRR, PI, Payback Period, DPP, and project a 5-year income statement and cash flow in a Microsoft Excel spreadsheet. The future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project's cost of capital and its risk is what’s needs to forecast the investment. Next, all of the asset's future positive cash flows are reduced into one current value number. Subtracting this number from the original cash expense required for the investment provides the net present value (NPV) of the investment. Using the internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings.
Relationship between Net Present Value and IRR
Net present value of an investment is equal to the “present value of its annual free cash flow less the investments initial outlay” (Kewon 2013 pg 310). Whenever the NPV is greater or equal to zero we should accept the project, whenever the NPV is negative the project should be rejected. Internal rate of return answers the question of what “rate of return will the project earn” (Kewon 2013 pg 316). IRR is the “discount rate that equates the present value of the project’s free cash flows with the project’s initial cash outlay” (Kewon 2013 pg 316). The discount rate is the rate that is used within capital budgeting that allows for the net present value of cash flow within a project to equal zero. The higher the IRR the more desirable the project is versus the lower the IRR the less desirable the project is.
In consequence, the NPV method
Theresa Cruz, Jesika Watson, Sophina Lane
QRB/501
March 30, 2015
Melinda Gregg
Capital Budgeting Case
Analyzing the Results
In the two capital budgeting cases corporations (A and B) have different revenues values and expenses as well as variable depreciation expenses, tax rates and discount rates. The members of our team had to compute both corporate cases NVP, IRR, PI, Payback Period, DPP, and project a 5-year income statement and cash flow in a Microsoft Excel spreadsheet. The future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project's cost of capital and its risk is what’s needs to forecast the investment. Next, all of the asset's future positive cash flows are reduced into one current value number. Subtracting this number from the original cash expense required for the investment provides the net present value (NPV) of the investment. Using the internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings.
Relationship between Net Present Value and IRR
Net present value of an investment is equal to the “present value of its annual free cash flow less the investments initial outlay” (Kewon 2013 pg 310). Whenever the NPV is greater or equal to zero we should accept the project, whenever the NPV is negative the project should be rejected. Internal rate of return answers the question of what “rate of return will the project earn” (Kewon 2013 pg 316). IRR is the “discount rate that equates the present value of the project’s free cash flows with the project’s initial cash outlay” (Kewon 2013 pg 316). The discount rate is the rate that is used within capital budgeting that allows for the net present value of cash flow within a project to equal zero. The higher the IRR the more desirable the project is versus the lower the IRR the less desirable the project is.
In consequence, the NPV method
References: Keown, A. J., Martin, J. D., & Petty, J. W. (2013). Foundations of Finance, 8th Edition. [VitalSource Bookshelf version]. Retrieved from http://online.vitalsource.com/books/9781269882194/id/ch10lev2sec2 Keown, A. J., Martin, J. D., & Petty, J. W. (2013). Foundations of Finance, 8th Edition. [VitalSource Bookshelf version]. Retrieved from http://online.vitalsource.com/books/9781269882194/id/ch10lev2sec5