In: Finance
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.
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 | |||
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. |