Your company is considering a new capital investment with different initial costs as noted in the table below. You want to consider whether this investment is appropriate for your firm- and want to consider your options based on a net present value analysis.
Given the following information:
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Project A
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Project B
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Overall Cost
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Inflow:
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Year 1
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$150,000
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$50,000
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Year 2
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$65,000
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$50,000
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Year 3
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$60,000
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$50,000
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Year 4
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$50,000
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Year 5
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$50,000
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You are in charge of the creation of the capital budget for this new acquisition and have been asked to calculate the following:
- The project Payback
- The project's Net Present Value (at a discount rate of 12%
- The overall cash flow of the project.
Before starting the capital budgeting process, it is important for the potential investor/board members to consider long range goals. A realistic evaluation of the project will be determined not only by the data generated from the budgeting process, but also by the attitude of the potential investor. The potential investor should answer these questions: Am I entering the business to purely maximize the return from my investment? Or, is my search for profits tempered by a desire for a lower, more stable level of "satisfactory profits" that will, hopefully, result in a better prospect of long term survival for the business? Honest answers to such questions will affect decisions throughout the entire capital budgeting process.
Calculate the three items that you have determined that you noted above. For each, show your calculations and your eventual calculation.