Get Full Essay Get access to this section to get all help you need with your essay and educational issues. Get Access Considering the present Essay Sample Reflecting back on my many life experiences, the birth of my daughter and joining the military has had a significant positive impact on my life. Both experiences are significant because they have shaped me into the woman that I am today.
Capital budgeting techniques explanations Net present value method also known as discounted cash flow method is a popular capital budgeting technique that takes into account the time value of money. It uses net present value of the investment project as the base to accept or reject a proposed investment in projects like purchase of new equipment, purchase of inventory, expansion or addition of existing plant assets and the installation of new plants etc.
First, I would explain what is net present value and then how it is used to analyze investment projects. Net present value NPV: Net present value is the difference between the present value of cash inflows and the present value of cash outflows that occur as a result of undertaking an investment project.
It may be positive, zero or negative. These three possibilities of net present value are briefly explained below: If present value of cash inflows is greater than the present value of the cash outflows, the net present value is said to be positive and the investment proposal is considered to be acceptable.
If present value of cash inflow is equal to present value of cash outflow, the net present value is said to be zero and the investment proposal is considered to be acceptable. If present value of cash inflow is less than present value of cash outflow, the net present value is said to be negative and the investment proposal is rejected.
The summary of the concept explained so far is given below: The following example illustrates the use of net present value method in analyzing an investment proposal. The management of Fine Electronics Company is considering to purchase an equipment to be attached with the main manufacturing machine.
The useful life of the equipment is 6 years. After 6 years it will have no salvage value. Compute net present value NPV of this investment project. Should the equipment be purchased according to NPV analysis?
Investments in assets are usually made with the intention to generate revenue or reduce costs in future. The reduction in cost is considered equivalent to increase in revenues and should, therefore, be treated as cash inflow in capital budgeting computations.
The net present value method is used not only to evaluate investment projects that generate cash inflow but also to evaluate investment projects that reduce costs. The following example illustrates how this capital budgeting method is used to analyze a cost reduction project: Example 2 — cost reduction project: Smart Manufacturing Company is planning to reduce its labor costs by automating a critical task that is currently performed manually.
The automation requires the installation of a new machine. The life of the machine is 15 years. The salvage value of the machine after fifteen years will be zero.
Should Smart Manufacturing Company purchase the machine? According to net present value method, Smart Manufacturing Company should purchase the machine because the present value of the cost savings is greater than the present value of the initial cost to purchase and install the machine.
The computations are given below: Net present value method — uneven cash flow: Notice that the projects in the above examples generate equal cash inflow in all the periods the cost saving in example 2 has been treated as cash inflow.
Such a flow of cash is known as even cash flow. But sometimes projects do not generate equal cash inflows in all the periods. When projects generate different cash inflows in different periods, the flow of cash is known as uneven cash flow.
To analyze such projects the present value of the inflow of cash is computed for each period separately. It has been illustrated in the following example: The cash inflow generated by the project is uneven.
Therefore, the present value would be computed for each year separately: The project seems attractive because its net present value is positive.
Choosing among several alternative investment proposals: Sometime a company may have limited funds but several alternative proposals. In such circumstances, if each alternative requires the same amount of investment, the one with the highest net present value is preferred.
But if each proposal requires a different amount of investment, then proposals are ranked using an index called present value index or profitability index.
The proposal with the highest present value index is considered the best. Present value index is computed using the following formula:Related Documents: Essay about Considering the Present Past Present Future Essay Past Present and Future Paper Nicole Bowers GEN/Interdisciplinary Capstone Course November 17, Dr.
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