Group Assignment # 2
Details of Projects L and S
NETPRESENT VALUE OF PROJECT
| Period | AMOUNT(L) | AMOUNT (S) | D.F | P.V(L) | PV (s) | ||||||||||
|
1 |
10 |
70 |
(1+0.1)1=1.10 | 10/1.1=9.09 | 70/1.1=63.64 | ||||||||||
|
2 |
60 |
50 |
(1+0.1)2=1.21 | 60/1.21=49.59 | 50/1.22=40.98 | ||||||||||
|
4 |
80 |
20 |
(1+0.1)3=1.33` | 80/1.331=60.11 | 20/1.332=15.02 | ||||||||||
| TOTAL | 118.69 | 119.63 | |||||||||||||
| NPV | 118.69-100=18.69 | 119.63-100=19.63 | |||||||||||||
INTERNAL RATE OF RETURN |
|||||||||||||||
| Period | AMOUNT(L) | AMOUNT (S) | D.F | P.V(L) | PV (s) | ||||||||||
|
1 |
10 |
70 |
(1+0.1)1=10 | 10/1=9.09 | 70/1.1=63.64 | ||||||||||
|
2 |
60 |
50 |
(1+0.1)2=11 | 60/1.21=49.59 | 50/1.22=40.98 | ||||||||||
|
4 |
80 |
20 |
(1+0.1)3=13` | 80/1.331=60.111 | 20/1.332=15.02 | ||||||||||
| TOTAL |
118.69 |
119.63 |
|||||||||||||
| NPV | 118.69100=189 | 119.63-100=19.63 | |||||||||||||
| EXPECTED FUTURE CASH FLOW | |||||||||||||||
| Period | L | C.F | S | C.F | |||||||||||
| YEAR 1 | 10 | 10 | 70 | 70 | |||||||||||
| YEAR 2 | 60 | 70 | 50 | 120 | |||||||||||
| YEAR 3 | 80 | 150 | 20 | 140 | |||||||||||
| INITIAL PROJECT COST | ||
|
PROJEC L=100 |
PROJECT S=100 | |
| THE PAY BACK PERIOD | ||
|
3 YEARS |
2 YEARS | |
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Discussion of the Computations
The capital budgeting techniques calculated above are meant to enable the project managers the ability to select which of the two projects is financially viable and should be considered for investment. The three capital appraisal techniques are used to ascertain the best project that will earn good returns at the shortest time possible. The techniques are based on whether they are discounted or none discounted. Discounted capital budgeting techniques are those that take into account the time value of money while the non-discounted techniques do not take into account the time value of money (Srithongrung, 2017) . The verdict on the techniques is discussed below;
Net Present Value
The net present value of a project is obtained by subtracting the initial cost of investing in the project from the net present value of the project. The project that will give a higher net present value will be selected for investment. The two projects above Project L have a net present value of $18.69 while project S has a net present value of 19.63. The viable project in this case would be project S because it has a relatively higher net present value.
Internal Rate of Return
This is the point where a firm’s net present value is equal to zero. This is the discounting factor that will give a net present value of zero where the net present value of the project and the present value of the initial cost is zero. The internal rate of return of project S shows the potential of giving an investment within the potential of good returns if invested in.
Payback Period
This is the period taken by the project to pay back the initial cost of investment. For the two projects with an initial investment cost of 100, project S took a relatively shorter period of 2 years while L paid back in 3 years.
Project P
Net Present Value
| period | Amount | D.F | PV |
| 0 | 800,000 | ||
| 1 | 5,000,000 | 1+0.1)2=1.21 | 4132231.40 |
| 2 | 5,000,000 | (1+0.1)3=1.33 | 3759398.50 |
| NPV | 7091629.9 |
Internal Rate of Return
| period | Amount | D.F | PV (10%) | 15% | 8% |
| 0 | 800,000 | ||||
| 1 | 5,000,000 | 1+0.1)2=1.21 | 4132231.40 | 4347826.08 | 4629629.63 |
| 2 | 5,000,000 | (1+0.1)3=1.33 | 3759398.50 | 3780718.33 | 3759398.50 |
| 7091629.9 | 7328544.41 | 7589028.13 |
Payback Period
| Period | Amount | C.F |
| 0 | 800,000 | |
| 1 | 5,000,000 | 5,000,000 |
| 2 | 5,000,000 | 10,000,000 |
| Payback | 1 st year |
Discussion
A look at the results of the capital appraisal techniques, the values obtained are positive and therefore financially viable to invest in because the project has a prospect of positive returns to the investors. An analysis of the project’s initial investment through the use of the net present value, the internal rate of return and the payback period indicate the potential investment in the project is viable and should therefore viable to be accepted. The results indicate that the project will give positive returns and at the same time pay back the initial investment at the first year of operations.
References
Paseda, O. (2016). Advanced Capital Budgeting Techniques: A Review Article. SSRN Electronic Journal . doi: 10.2139/ssrn.2901530
Srithongrung, A. (2017). Capital Budgeting and Management Practices: Smoothing Out Rough Spots in Government Outlays. Public Budgeting & Finance , 38 (1), 47-71. doi: 10.1111/pbaf.12167
