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  • Captial Budgeting Sums

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    vivekanandhan ragu
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    This document provides solutions to two capital budgeting problems: 1. It evaluates an investment proposal with $50,000 initial cost and cash inflows of $20,000, $15,000, $25,000, and $10,000 over four years at a 10% discount rate. The net present value is positive at $6,175, so the proposal is accepted. 2. It compares two machines, A and B, each costing $80,000. Using the payback, rate of return, and net present value methods at a 10% discount rate, it finds that machine B is preferred under the rate of return and net present value methods but machine A is preferred under

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    Problem and answer

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    Captial budgeting sums

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    This document provides solutions to two capital budgeting problems: 1. It evaluates an investment proposal with $50,000 initial cost and cash inflows of $20,000, $15,000, $25,000, and $10,000 over four years at a 10% discount rate. The net present value is positive at $6,175, so the proposal is accepted. 2. It compares two machines, A and B, each costing $80,000. Using the payback, rate of return, and net present value methods at a 10% discount rate, it finds that machine B is preferred under the rate of return and net present value methods but machine A is preferred under

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    11 views2 pages

    Captial Budgeting Sums

    Uploaded by

    vivekanandhan ragu
    This document provides solutions to two capital budgeting problems: 1. It evaluates an investment proposal with $50,000 initial cost and cash inflows of $20,000, $15,000, $25,000, and $10,000 over four years at a 10% discount rate. The net present value is positive at $6,175, so the proposal is accepted. 2. It compares two machines, A and B, each costing $80,000. Using the payback, rate of return, and net present value methods at a 10% discount rate, it finds that machine B is preferred under the rate of return and net present value methods but machine A is preferred under

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    Certainly! Let’s delve into some capital budgeting problems in the realm of commerce. These
    scenarios involve evaluating investment decisions for long-term projects. I’ll provide solutions
    for a couple of these problems:

    1. Problem 1: Evaluating an Investment Proposal

    Given: The cost of a project is $50,000, and it generates cash inflows of $20,000,
    $15,000, $25,000, and $10,000 over four years.
    Objective: Using the present value index method, appraise the profitability of the
    proposed investment, assuming a 10% rate of discount.
    Solution:
    Calculate the present value of each cash inflow using the discount factor at 10%:
    Year 1: $20,000 × 0.909 = $18,180
    Year 2: $15,000 × 0.826 = $12,390
    Year 3: $25,000 × 0.751 = $18,775
    Year 4: $10,000 × 0.683 = $6,830
    Total present value = $56,175
    Net present value (NPV) = Total present value - Initial outlay = $56,175 - $50,000 =
    $6,175
    Profitability Index (PI) = Present value of cash inflows / Initial cash outflow =
    $56,175 / $50,000 = 1.1235
    Net Profitability Index (NPI) = PI - 1 = 0.1235
    Conclusion: Since the PI is greater than 1.0 and NPI is positive, we can accept the
    proposal.

    2. Problem 2: Choosing Between Two Machines

    Given: Machines A and B are available for $80,000 each. Earnings after taxation for
    both machines are provided.
    Objective: Evaluate the two alternatives using:
    (a) Payback method
    (b) Rate of return on investment (ROI) method
    © Net present value (NPV) method with a 10% discount rate.
    Solution:
    (a) Payback method:
    Machine A: Payback period = 2 years and 7.2 months
    Machine B: Payback period = 3 1/3 years
    Machine A is preferred based on payback.
    (b) ROI method:
    ROI for Machine A = 28%
    ROI for Machine B = 32%
    Machine B is preferred due to the higher ROI rate.
    © NPV method:
    Calculate the present value of cash flows for both machines:
    Machine A NPV = $21,816 + $19,824 + $24,032 + $16,392 + $9,936 =
    $1,36,000
    Machine B NPV = $7,272 + $19,872 + $32,784 = $59,928
    Machine B has a higher NPV and is preferred.
    Whether it’s bananas or dollars, making informed investment choices matters! 🍌💰
    Remember, capital budgeting decisions play a crucial role in shaping a company’s future.
    .

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