Question

In: Finance

What is a Capital Project Analysis?

What is a Capital Project Analysis?

Solutions

Expert Solution

Capital projects involve the purchase of items as machinery,land, buildings,or any other long term asset.These investments require a large amount of money that needs to be invested in a lumpsum at the time of investment, however the returns are accumulated or accrued over a period of time. So the ultimate goal is to improve the financial performance of the company and for that we need to check the projects' economic and financial feasibility by doing the analysis.

The analysis is done using capital budgeting process that helps in selecting those alternatives that adds most value to the business for a long run within the boundaries of budget, framework of the company and objectives of the project. Making a capital budgeting decision involves analyzing the cash inflows and cash outflows and that analysis can be broadly divided into 6 steprate

1. selection of a discount rate that appropriately refers to the time value of money.\

2. Calculate the present value of the cash outflow.

3. Calculate the net cash inflow over the years, till the end of life of the invested property.

4. Calculate the PV of the annual net cash inflow

5. calculate the net present value, including the salvage value, if any

6. Accept or reject the proposal


Related Solutions

Exercise Example - Capital Budgeting Project Analysis - Chapter 5 As director of capital budgeting, you...
Exercise Example - Capital Budgeting Project Analysis - Chapter 5 As director of capital budgeting, you are reviewing three potential investment projects with the following cost and cash flow projections.   Cash Flow Project A Project B Project C Investment Cost ($500,000) ($375,000) ($475,000) Year One Cash Flow $200,000 $175,000 $250,000 Year Two Cash Flow $180,000 $50,000 $200,000 Year Three Cash Flow $100,000 $50,000 $75,000 Year Four Cash Flow $80,000 $50,000 $30,000 Year Five Cash Flow $140,000 $300,000 $30,000 Calculate the...
What is the appropriate cost of capital for the project?
Empress Inc. has issued a bond with a face value of $1,000 and an interest rate of 13% to fund a new project. The bond is secured by the cash flows from the project, which will be $950 with a probability of 60% and $1,200 otherwise. Assume risk neutrality.What is the appropriate cost of capital for the project?
What are the PESTEL analysis for project Chariot?
What are the PESTEL analysis for project Chariot?
What is traditional capital budgeting analysis? What are its shortcomings? What is real options analysis? What...
What is traditional capital budgeting analysis? What are its shortcomings? What is real options analysis? What are examples of real options? How can simulation be used to study real options in projects?
(a) What is meant by working capital? (b) Why is an analysis of working capital important?...
(a) What is meant by working capital? (b) Why is an analysis of working capital important? (c) Do a little research to show an example of a corporation with weak or strong working capital and why?
15.5 a. How is project risk incorporated into a capital budgeting analysis? b. Suppose that two...
15.5 a. How is project risk incorporated into a capital budgeting analysis? b. Suppose that two mutually exclusive projects are being evaluated on the basis of cash costs. How would risk adjustments be applied in this situation?
6) Refer to the capital budgeting narrative. What is the MIRR of the project? Capital Budgeting...
6) Refer to the capital budgeting narrative. What is the MIRR of the project? Capital Budgeting Narrative: (Use the following information for questions referring to the narrative): Aferine Electric is considering a new project. The initial investment required is $106,639.60 and the cost of capital is 8%. Expected cash flows over the next four years are given below: Years Cash Flow ($) 1 7,000 2 37,000 3 41,000 4 90,000 A) 17.1% B) 13.8% C) 14.1% D) 15.0% E) 8%
6.3: For the projects shown, what is the capital recovery cost? Project P Project Q Project...
6.3: For the projects shown, what is the capital recovery cost? Project P Project Q Project R Project S Project T Project U Initial Cost ($120,000) ($230,000) ($350,000) ($450,000) ($530,000) ($690,000) Salvage value (% of IC) 20% 15% -12% 16% -11% 32% Project life 3 4 5 6 7 9 Rate of interest (MARR) 12% 11% 14% 15% 13% 10%
Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The company estimates...
Scenario Analysis Shao Industries is considering a proposed project for its capital budget. The company estimates the project's NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. The company's CFO, however, forecasts there is only a 50% chance that the economy will be average. Recognizing this uncertainty, she has also performed the following scenario analysis: Economic Scenario Probability of Outcome NPV Recession 0.05 -$36 million     Below average 0.20...
When preparing capital budgeting analysis for a new project, Chris Johnson, a chief financial officer at...
When preparing capital budgeting analysis for a new project, Chris Johnson, a chief financial officer at BT Industries, faced a dilemma. The project involved a production of new type of shipping containers, which were significantly more durable and had a considerably longer useful life compared to conventional containers used in the industry. The year was 2009, and the equipment necessary for producing the containers was being sold for $900K. Each year, this cost is expected to increase by 20%. The...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT