6-1 Final Project Milestone Three: Capital Budgeting Data (Section IV)
SNHU
Capital budgeting Analysis f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f | 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 every criterion 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. 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 f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f f | 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.
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.
