ADMS 2510 Lecture Notes - Working Capital, Payback Period, Capital Budgeting

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amethystarmadillo670

31 Mar 2013

School

York University

Department

Administrative Studies

Course

ADMS 2510

Professor

Alison Beavis

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ADMS 2510 Full Course Notes

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Document Summary

Capital budgeting: the process of planning significant outlays on projects that have long-term implications, such as the purchase of new equipment or the introduction of a new product. Screening decision: a decision as to whether a proposed investment meets some pre-established profitability hurdle. Preference decision: a decision as to which of several competing acceptable investment proposals is best. Net present value: the difference between the present value of the cash inflows and the present value of the cash outflows associated with an investment project. Working capital: the excess of current assets over current liabilities. Cost of capital: the average rate of return companies must pay to long-term creditors and shareholders for the use of their funds. Out of pocket costs: actual cash outlays for operating costs. Internal rate of return: the discount rate at which the net present value of an investment project is zero.

Related Questions

Blaine Company is considering four investment proposals, each requiring the same amount of initial cash investment. The excess present value index for each proposal is listed below. Using the index as a selection criterion, identify the index of the most attractive proposal.

a. 90

b. 100

c. 110

d. 115

The primary limitation of the cash payback method is that it

a. Uses before-tax cash flows.

b. Identifies the length of time it will take to recover the investment outlay in cash.

c. Ignores the profitability of one investment project as compared to another.

d. Involves a more sophisticated analysis than the net present value method.

Which of the following is not one of the considerations given to capital budgeting proposals?

Select one:

A. Whether there is an immediate need to replace or repair critical assets

B. Whether the proposal is in compliance with capital budgeting policies

C. Whether the proposal would meet the established minimum return on capital

D. Whether the proposal is congruent with the firm's long-term goals

E. All of the above are considerations given to capital budgeting proposals

Vasquez Corporation is considering investing in two differentprojects. It could invest in both, neither, or just one of theprojects. The forecasts for the projects are as follows.
Project A Project B
Capital investment $195,950 $301,810
Net annual cash flows $50,535 $65,116
Length of project 5 years 7 years

The minimum rate of return acceptable to Vasquez is 10%.

Instructions Compute the net present value of the two projects.(Round answers to 0 decimal places, e.g. 125. If amount isnegative, use either a negative sign preceding the number eg -45 orparentheses eg (45).)

PROJECT A $
PROJECT B $

What capital budgeting decision should Vasquez make? Investin

Project A could be modified. By spending $19,395 more initially,the net annual cash flows could be increased by $10,160 peryear.

Calculate the new net present value. $ ______________Whatproject(s) should Vasquez's invest in?

ambercicada418

Capital Budgeting
Glacier Creek Textiles is planning to purchase new manufacturing equipment. The equipment has an acquisition cost of $100,000, an estimated useful life of five years and no residual value. The company uses a 12% rate of return to evaluate capital projects. The cash flows for the five years:

Year	Net Cash Outflows	Net Cash Inflows
Year	Amount invested	Net Cash Inflows
0	($100,000)
1		25,000
2		29,000
3		26,000
4		28,000
5		35,000


Requirements
1. Compute the accounting rate of return.
2. Compute the net present value of the investment using Excel's PV function.
3. Compute the net present value of the investment using Excel's NPV function.
4. Compute the profitability index, rounded to two decimal places.
5. Compute the internal rate of return of the investment using Excel's IRR function. Display to two decimal places, but do not round.

Excel Skills
1. Function PV
2. Function NPV
3. Function IRR

	Evaluate Glacier Creek Textiles' new manufacturing equipment.

	Data
	Annual discount Rate	0.12
	Cash Flow Year 0 (Cost)	(100,000)
	Cash Flow Year 1	25,000
	Cash Flow Year 2	29,000
	Cash Flow Year 3	26,000
	Cash Flow Year 4	28,000
	Cash Flow Year 5	35,000
	Useful Life in years	5
	Residual value	0



Requirement 1	Compute the Accounting Rate of Return

	Average annual operating income	Average amount invested	Accounting Rate of Return - ARR
	xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx	xxxxxxxxxxxxxx	xxxxxxxxxxxxxxxxx



Requirement 2	Compute the net present value of the investment using Excel's PV function.

	Period	Cash Flows
	1	(22,321)	Note: The first period is shown as an example.
	2	xxxxxxxx
	3	xxxxxxxx
	4	xxxxxxxx
	5	xxxxxxxx
	Present value of net cash flows	xxxxxxxx	Note: PV calculates the present value as a negative amount.
	Cost of Asset	xxxxxxxx
	Net Present Value	xxxxxxxx



Requirement 3	Compute the net present value of the investment using Excel's NPV function


	Present value of net cash flows	xxxxxxxxxx
	Cost of asset	xxxxxxxxxx
	Net Present Value	xxxxxxxxxx


Requirement 4	Compute the profitability index, rounded to two decimal places.

	Profitability index	xxxxxxxxxx


Requirement 5	Compute the internal rate of return of the investment using Excel's IRR function.
	Display to two decimal places, but do not round.

	IRR	xxxxxxxxx	Note: IRR requires a negative amount for the investment.

Places with xxxxx's are what needs to be filled in, and it's for excel so if I could see the references to which numbers and the formula used that would be helpful. Thank you!!

tanimpala296

ADMS 2510 Lecture Notes - Working Capital, Payback Period, Capital Budgeting

ADMS 2510 Full Course Notes

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