Capital Budgeting Assignment Project, Essay Example

• The depreciation will reduce the amounts used in calculation of N.P.V. hence reducing the N.P.V. reported
• Net present value:

This is used to determine the difference between present cash inflow values and present value of cash outflows.

When the NPV is positive, it indicates growth of shareholders investments thus showing a project should be considered or taken up.

In our case, the NPV is positive thus the project should be accepted.

• Internal rate of return

This is a rate used to equate the present value of cash outflows to the cash inflows of a project.

A project should be undertaken if the IRR is greater than the cost of capital.

In our case the cost of capital is at 12% which is lower than the IRR thus the project should be accepted.

• The difference between the internal rate of return and the accounting rate of return arises because the accounting rate of return is calculated based on the accounting inflows or profits while the internal rate of return is calculated base on the present value of cash flows. This implies that the firm’s profits will be affected by the IRR over a period of time. Firms with a longer IRR require maintaining good cash inflows over time (Mayes & Todd, 2007). This is also determined by the number of transactions that the company processes.
• The importance of unadjusted pay back period is that it shows the period it takes to recover the initial cash outlay/investment without assuming that the cash flows are generated uniformly.
• The weighted average  cost of capital when utilizing NPV is of the project can only be accepted if the NPV is greater than W.A.C.C(Weighted average cost of capital) since this shows that the project has resources to which enhance share holders wealth and returns (Bragg & Englewood, 2006).
• For a project to be acceptable when weighted average cost of capital has been calculated utilizing IRR,then, the project can only be accepted if the IRR is greater than W.A.C.C(Weighted average cost of capital) since this indicates that the project has resources to increase share holders wealth/investments.

References

Bragg, S.M., & Englewood, C. (2006). Financial Analysis: A Controller’s Guide, (2^nd ed.). New York: John Wiley & Sons.

Mayes, T.R. & Todd M.S. (2007). Financial Analysis with Microsoft Excel, (4^th Ed.).