6-1 Final Project Milestone Three: Capital Budgeting Data (Section IV)
SNHU
Capital budgeting Analysis a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a | 1
Looking at the alternative chosen by me , from the alternatives available , its NPV is
positive by $ 41,575, which is quite substantive and if we take into consideration
WACC of 5%, in that regard also IRR comes down to 5.1% , which also suggest that
project is financially viable, and it should be accepted. If we look at the calculation
table it is quite evident that there has been quite a consistent cash flow in each year,
there is not much variance in cash flow, on the contrary there has been quite consistent
increase in cash flow, which gives the strength to my point that looking at different
aspects of the project, the project should be accepted, as it fulfills the every criteria
required for financially viable project.
B) NPV: Net present value of future cash flows at a particular discount rate suitable for
the project after deducting initial investment at current value, if NPV is 0 or positive ,
it is an indication that project can be accepted, more the value of NPV is positive the
more financial viability of the project increases (Bouten et al., 2016). In a simple
manner of speaking, Net Present Value can be described as the difference between
present value of cash inflows and present value of cash outflows over a specific period
of time. It is used to calculate the capital budgeting and investment planning for the
analysis of the profitability of projected investment or project. While calculating the
net present value, it is necessary to make estimation about the timing, amount and
future cash flows and determine the discount rate. Generally the discount rate is
calculated to be equivalent to the minimum acceptable rate of return. There is a
probability that the discount rate would have impact on the cost of capital or the returns
available on alternate investments of comparative risks (PARMENTIER, 2019). If the
net present value is positive then the rate of return will be more than discount rate.
Capital budgeting Analysis a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a | 2
IRR: IRR of the project gives a rate where future cash inflow if discounted at same
rate it is equal to the PV of cash outflow. It gives a minimum criteria rate below which
rate project will not be financially viable. The Internal Rate of Return is used
estimating the profitability of potential investments. Internal Rate of return can be
described as the rate that is responsible for making the net present value of cash flows
zero in case of discounted cash flow analysis (Maritz, 2021). When making
investments, if the IRR is higher, then the chances of profits are better. While
comparing both method my observation is NPV is much more suitable to select the
viability of the project compared to IRR as it just not gives a clear indication whether
project should be accepted but it also gives a $ value to support its case, while IRR
just give a rate and not any substantive value. So in my view point NPV is much better
suited for accepting or rejecting the project as compared to IRR.
Capital budgeting Analysis a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a | 3
References
Bouten, L., Palepu, K. G., & Healy, P. M. (2016). Financial analysis. Cengage
Learning EMEA.
Maritz, C. J. (2021). Financial statements. EDGE Education.
PARMENTIER, G. U. Y. (2019). Financial analysis. INTERSENTIA.
