Capital budgeting allows a firm to determine the feasibility of a project. Feasibility check depends on the present value of the project’s net cash flow. A positive NPV indicates that the project is feasible while a negative one indicates no returns, therefore, not feasible.
Question One
The NPV for the expansion project is $57,186. It is a feasible project as the NPV is positive meaning that the project will generate more cash inflow than cash outflow. The project will give returns to GBS during its useful life of ten years.
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Question Two
Selling the machine after a useful life of five years will yield no returns as the NPV is $-27,254. A NPV indicates more cash outflows than the inflows hence no return on investment. This project is not feasible, as GBS will not enjoy any returns from the project.
Question Three
Based on the calculations, an increase in sales revenue by $105,000 will yield an NPV of $-16,549 . A negative NPV is due to cash outflows exceeding the cash inflows hence no returns. In such a case, the machine is not profitable.
Question Four
An increase in sales revenue by $125,000 yields a net profit and an NPV of $20,319 . When a project yields a positive NPV, it is profitable because the cash inflows exceed the outflows.
Question Five
The machine is acceptable under these conditions because the NPV is $1,885 which is positive. A positive NPV shows that the project will yield returns because the cash inflows are more than the cash outflows. GBS will receive more from the project than it will spend on it.
