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In: Finance

Create professional memo answering the following questions. Your memo should include an brief introduction of why...

Create professional memo answering the following questions. Your memo should include an brief introduction of why you are writing this memo and also must include a closing statement of how you can be reached for questions.

  1. Should the Project be accepted or rejected?
  2. Explain your rational for your answer in question 2.
Capital Budgeting
Year Discounting Period Cash Flows Present Value of cash flows Computation
Year 1 0 -1000 -1000
Year 2 1 500 476.1904762 476.1904762
Year 3 2 500 453.5147392 453.5147392
Year 4 3 500 431.9187993 431.9187993
Year 5 4 500 411.3512374 411.3512374
Cost of Capital 5%
Present value of cash flows 772.9752521

Solutions

Expert Solution

At the outset, I wish to thank the management , for entrusting me, the feasibility study for the much-awaited project, to be undertaken shortly.
It is also a good opportunity to use my professional skills , to the best advantage.
The purpose of writing this memo is to   convey what the results of the analysis of the cash flows of the project in deliberation, points to.
To that end, the project's cash flows pertaining to the next five years have been discounted to their respective present values.The discount rate used is the cost of capital, equalling 5%
The sum of such present values, ie.the net present values works out to $ 772.98
As the NPV of the cash flows is POSITIVE,it means that the project will add value to the shareholders of the company, ie. Increase their networth--- the project can be ACCEPTED.
The tabulation of the year-wise cash flows , with their discounted values & the NPV is as given here-under:
Discounting period CFs PV F at 5% PV at 5%
Year 1 0 -1000 1 -1000
Year 2 1 500 0.95238 476.1905
Year 3 2 500 0.90703 453.5147
Year 4 3 500 0.86384 431.9188
Year 5 4 500 0.82270 411.3512
772.9753
Cost of Capital 5%
PV of CFs 772.98
I sincerely hope that I have made myself clear , with respect to the financial aspects of the project.
Please have a look into the details .I shall be available , over the entire next week , for any sort of discussion ,on matters or particulars ,contained in the study.

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