allocating capital to areas that will increase shareholder value and add the most value to...

Question

allocating capital to areas that will increase shareholder value and add the most value to the
company. This means forecasting the projected cash flows of the projects and employing
capital budgeting metrics to determine which project, given the forecast cash flows, gives
the firm the best chance to maximize shareholder value. As a finance professional, you are
expected to:
~ Use capital budgeting tools to compute future project cash flows and compare them fC
upfront costs. in
Evaluate capital projects and make appropriate decision recommendations. =
are reports and present the evaluation i in a way that finance and non-fi na
olders can understand.

‘proposed capital projects based on forecasted cash flow. You have completed orecash
~ projected cash flows of the projects as reflected | in 1the Alinched Spreadsheets, Proje :
Cash Flows [XLSX]. You now need to condu
e most shareholder value to the organi:

| Requirements
pute future project cash flows and compare them to
upfront costs. Remember to only e
valuate the incremental changes to cash flows.
Employing capital budgeting metrics, determine which project, given the forecast cash
flows, gives the organization the best chance to maximize shareholder value.
Demonstrate knowledge of 3 variety
of capital budgeting tools including net present
value (NPV), internal rate of return (IRR)
RR), payback period, and profitability index (PI). The
analysis of the capital projects will need to be Co
ectly computed and the resulting
decisions rational. fii |
Evaluate capital projects and make appropriate decision recommendations. Accurz
compare the indicated projects with co
ect computations of capital budgeting
then make rational decisions based on the findings. :
Select the best capital project, based on data an
value for the company. Prpvide a ratio
ial analysis

ject A: E Mater Equip Y ent Wrchase

will 05 t $10 million; however, it is projected ti

alue estimated to be $500,000 at
e of return of the Projectis is 8%.
7 ens schedule.

VAC R
sales for year 1 are Brojscted at $20 mili |

The marginal corporate tax rate is presumed to be 25%.
fm 0 1)
Being a risky investment, the required rate of return of the prdject is 12%.
E | 0 i nn |
ect C- Morkatine 7A ration Carns ton

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Nitish Lath · Accepted Answer

An Introduction
Capital budgeting is an appraisal tool used for the evaluation of the two or more proposed investment. It is a process which is used by the entities for evaluating the potential investments. It is the process which helps in analyzing the cash inflows and cash outflows from the project for the determination of the return from the investment. There are various methods which helps in the appraisal of the investment proposals such as NPV, IRR, payback period method and profitability index (Kenton W 2023). All the methods are having different selection criteria and the NPV is considered as superior method for the selection of the investment proposal. Although entities can pursue all the projects and investment for the enhancement of the shareholder value and profit. But the entities are having limited funds for investment and hence capital budgeting techniques are utilized for concluding the plans which will produce the best return for the business.
In the presented case, the business is having three investment proposal and it is important to decide which projects should be accepted.  The project A is related with the purchase of major equipment which will charge $10 million and this will reduce the cost of goods sold by 5%. In addition to this, it is having option of selecting project B which is related to the expansion into three more states and this will expand the sales and cost of goods sold by 10% for five years. Moreover, it is having third investment proposal of marketing and advertising campaign and it is assumed that the sales and cost of sales will increase by 15% by spending $2 million on advertising each year. The selection among the three-investment proposal will be based on the decisions of the different capital budgeting techniques.
Discussion on the tools of the capital budgeting i.e. NPV, IRR, payback period and profitability index
There are various methods which helps in the appraisal of the investment proposals such as NPV, payback period method, IRR and profitability index. All the methods are having different selection criteria and the NPV is considered as superior method for the selection of the investment proposal.
Net Present Value
It is the important method of the capital budgeting techniques which considers the current worth of the money inflows and the current worth of the currency outflows. In this method current worth of the money inflows is determined using the appropriate discount rate (Amy Gallo 2014). The NPV of the investment proposal is determined using the below formula which is:
Net Present Value = Current worth of cash inflows – Current worth of cash outflows
The venture will be accepted when the NPV is positive. This means that when the current worth of the money inflows are greater than the current worth of the cash outlays then the project will be accepted and vice-versa. In other words, when the NPV is positive then the projected will be accepted and else rejected.

Use capital budgeting tools to determine the quality of 3 proposed investment projects and prepare a 7 page report that analyzes your computations and recommends the project that will bring the most...

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