Assignment 2



Capital Investment Techniques

Name

Institution

Course

Instructor’s name

Date

Introduction

The underlying concept in the decision making of capital investment cost-benefit analysis (Nijman, and Kampfraath). This process helps to facilitate the determination of a company’s short term and long term investments. Advertising campaigns, equipment, new machinery, new plants, research and development projects are some of some company components that come under this kind of capital investment appraisal. The case studies below demonstrate how different techniques used to determine capital investment appraisal of a business project (Marić, 2018).

Case study 1)

A= 300,000(1+0.04) ^5

A=$ 364,995.87 (amount in the account after five years)

2) Payback Period

90,000+115,000+135,000 =340,000

The inflows will get to $300,000 in year 3. Thus we will recover our initial amount in the third year.

3)

Yr

Amnt

Discounting factor

Discounted amount

Accumulative inflow cash

One

90,000.00

1.060

84,905.66

84,905.66

Two

115,000.00

1.124

102,313.17

187,218.83

Three

135,000.00

1.191016

113,348.60

187,218.83

4)

NPV

Yr

Cash inflow

PVIF$1=1/(1+r)^n

Discounted inflow cash

Accumulative

One

90,000.00

0.943400

84,905.66

84,905.66

Two

115,000

0.8900

102,349.59

187,255.25

Three

135,000

0.8396

113,348.60

300,603.85

Four

110,000

0.7921

87,130.30

387,734.15

Five

90,000

0.7373

67,253.24

454,987.39

present value (pv) of total inflows =$ 454,987.39

Net Present Value =$(454,987.39-300,000.00)

=$154,987.39

5) If I would leave the money for five years in the bank but get $ 364,995.87, ending up short of 85,004.13 but when I undertook a project I would get $ 454,987.39 after 5 years which is $ 154,987.39 more.

Case study 2

A)

NBP

Yr

Amnt of Savings

cumulative Savings

One

60,000.00

60,000.00

Two

60,000.00

120,000.00

Three

60,000.00

180,000.00

PBP =60,000/12 = 5,000

PBP = 2 years and 9 months.

DBP

Yr

Amnt

PVIF$1=1/(1+r)^n

Discounted amnt

cumulative

One

60,000.00

1.10

54,545.45

54,545.45

Two

60,000.00

1.21

49,586.78

104,132.23

Three

60,000.00

1.331

45,078.89

149,211.12

The PBP is 165,000-104,132.23=60,867.77

Assuming the 45,078.89 was evenly accrued 60,867.77/3,756.57=16.2

PBP= 3 years 4.2 months

NPV

Year

Amount

PVIF$1=1/(1+r)^n

Discounted amnt

cumulative

0

-165,000.00

1.00

-165,000.00

-165,000.00

One

60,000.00

1.10

54,545.45

54,545.45

Two

60,000.00

1.21

49,586.78

104,132.23

Three

60,000.00

1.331

45,078.89

149,211.12

NPV= -165,000+149,211.12 = -15788.88

IRR=

B)

NBP

Yr

Amnt

Accumulated

One

60,000.00

60,000.00

Two

72,600.00

132,600.00

Three

79,860.00

212,460.00

PBP 79,860/12=6,655

So the PBP is 2 yrs 1 month

DBP

Yr

Amnt

PVIF$1=1/(1+r)^n

Discounted amount

Cumulative

One

60,000.00

1.0

54,545.45

54,545.45

Two

72,600.00

1.21

60,000

114,545.45

Three

79,860.00

1.331

60,000

174545.45

The PBP is60,000/12= 5,000

165,000-114,545.45=50,454.55

50,454.55/5000=10.1

PBP= 10 years and 1 month

Net Present Value

Yr

Amnt

PVIF$1=1/(1+r)^n

Discounted amnt

Cumulative

0

-165,000.00

1.0

-165,000

-165,000

One

60,000.00

1.10

54,545.45

54,545.45

Two

72,600.00

1.21

60,000

114,545.45

Three

79,860.00

1.331

60,000

174545.45

NPV= -165,000+174,545.45 = $9,545.45

IRR=

C)

NBP

Yr

Amount

Cumulated Savings

One

60,000.00

60,000.00

Two

60,000.00

120,000.00

Three

60,000.00

180,000.00

PBP =60,000/12 = 5,000

PBP = 2 yrs 9 months.

Discounted PBP

Yr

Amount

Discounting factor

Discounted amnt

Accumulative

One

60,000.00

1.150

52,173.91

52,173.91

Two

60,000

1.332

45,045.05

97,218.96

Three

60,000

1.52088

39,450.84

136,669.80

The amount required to attain PBP is not met

NPV

Yr

Amnt

Discounting factor

Discounted amnt

Accumulative

0

-165,000,oo

1

-165,000

-165,000

1

60,000.00

0.869600

52,176

112,824

2

60,000

0.7561

45,366

97,542

3

60,000

0.6575

39,450

136,992

NPV= -165,000+136,992= -28,008

IRR=

D)

NBP

Yr

Amount

Accumulated amount

One

60,000.00

60,000.00

Two

60,000.00

120,000.00

three

60,000.00

180,000.00

PBP =60,000/12 = 5,000

PBP is 2 years and 9 months.

DBP

Yr

Amnt

Discounting factor

Discounted amnt

Accumulative

0

165,000

1

-165,000

-165,000

1

60,000

0.909091

54,545.46

54,545.46

2

60,000

0.826446

49,586.76

104,132.22

3

60,000

0.751315

45,078.9

149,211.12

4

60,000

0.683013

40,980.78

190,191.9

5

60,000

0.620921

37,255.26

227,447.16

The PBP is 165,000-104,132.22=60,868

Assuming the 37,255.26 was evenly accrued 60,868/3,104.61=19.6

The PBP= 3 years and 6.6 months

NPV

Yr

Amnt

Discounting factor

Discounted amnt

Cumulative

0

165,000.00

1

-165,000

-165,000

One

60,000.00

0.909091

54,545.46

54,545.46

Two

60,000.00

0.826446

49,586.76

104,132.22

Three

60,000.00

0.751315

45,078.9

149,211.12

Four

60,000.00

0.683013

40,980.78

190,191.9

Five

60,000.00

0.620921

37,255.26

227,447.16

NPV= -165,000+227,447.16 = 62,447.16

IRR=

Discussion

1) Recommend is scenario D, because of its short PBP, top NPV and great IRR.

2) aggressive scenario is B. cash flows from both year 2 and 3 have to be compounded re-invested immediately after being realized.

3) the value of management in the discussed scenarios is to understand the difference between option A and B as well as get to know part B earnings are higher than those in A.

4) What to consider before making a recommendation (Nguyen)

Present economic conditions

Technology

Government laws and policies

5) I would approve this proposal because of the high returns I would gain.

Yr

Amount

Cumulative amnt

0

-585,000.00

-585,000.00

Five

-20,000.00

-605,000.00

One

-85,000.00

-85,000.00

Two

15,000.00

-70,000.00

Three

48,600.00

-21,000.00

Four

72,200.00

50,800.00

Five

95,550.00

146,000.00

Six

101,300.00

247,650.00

Seven

125,200.00

372,850.00

Eight

140,000.00

513,050.00

We lack a PBP

513,050 is less than 605,000

DBP

Yr

Amnt

1/(1+r)^n

Discounted amnt

Cumulative amnt

0

585,000.00

1

585,000

585,000

5

20,000.00

0.567427

11,348.54

596,348.54

1

85,000.00

0.892857

75,892.86

75,892.86

2

15,000.00

0.797194

11,957.91

63,934.95

3

48,600.00

0.71178

34,592.52

29,342 .43

4

72,200.00

0.635518

45,884.41

16,541.98

5

95,500.00

0.5657427

54,189.26

70,731.24

6

101,300.00

0.506631

51,321.73

122,052.97

7

125,200.00

0.452349

56,634.12

178,687.10

8

140,200.00

0.403883

56,624.43

235,311.52

9

300,000.00

0.403883

121,164.97

356,,476.49

Discounted PBP is not achieved by operations cash inflow.

Amount

Discounting factor 1/(1+r)^n

Discounted amount

Cumulative amount

585,000

1

585,000

585,000

20,000

0.567427

11,348.54

596,348.54

85,000

0.892857

75,892.86

75,892.86

15,000

0.797194

11,957.91

63,934.95

48,600

0.71178

34,592.52

29,342 .43

72,200

0.635518

45,884.41

16,541.98

95,500

0.5657427

54,189.26

70,731.24

101,300

0.506631

51,321.73

122,052.97

125,200

0.452349

56,634.12

178,687.10

140,200

0.403883

56,624.43

235,311.52

300,000

0.403883

121,164.97

356,,476.49

NPV= -370,717.47

IRR=4%

Discussion

:1) I would not recommend this purchase because NPV is negative, IRR is low and the absence of PBP it seems very much not viable.

2) -The period of to accomplish the project

-Dynamic economic conditions

-extra tax benefits

-NPV below zero

-Low return rate

-The PBP is not achieved

References

Branislav Marić. "Observing The Dependence Between Dynamic Indicators Of Investment Profitability - Relative Net Present Value And Internal Rate Of Return". AFRICAN JOURNAL OF BUSINESS MANAGEMENT, vol 5, no. 26, 2011. Academic Journals, doi:10.5897/ajbm10.1464.

Nguyen, Vy. Evaluation Of Capital Investments At Cliniqa Corporation.

Nijman, C, and A. A Kampfraath. The Management Perspective On The Performance Of The Irrigation Subsector.