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Introduction to the Capital project

Capital budgeting is a technique that is used to determine whether the investment made by the organization is valuable for them or not. In the current report, a business is planning to invest in some new assignments that are valuable for the business to increase its manufacturing of products. This project will increase the production of the company, but the company wants to evaluate whether the project will generate sufficient revenue for the business or not. To evaluate the project for company cash inflows, a discount rate for the project is considered.

Timeline and Estimated Cash Flow of the Project, Along With Inflow of Cash From the Project

The life of the project is four years, and it would require an initial investment (cash outflow) of £100000. From this project, the business will get cash inflows for years, and the estimated cash flows are detailed below.

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The interest rate for the discount and the required rate of return for the investment are:

In this current project, the business has determined that the discounting factor is 10%. This discount rate will determine the future cash flow of the company at its present value.

Net Present Value and Internal Rate of Return:

The net present value of the project is positive, which states that it is profitable for the company if it makes an investment in this project. If a discount rate of 10 percent is considered for the project, then it is beneficial for the business to invest in this project (Baker and English, 2011). So the project should be accepted by the company. NPV is one of the best techniques to evaluate whether it is beneficial to invest in the project or not because it is based on the present value of time (Pogue, 2004). It compares the value of the project with the present value of time and the future value of time.

Interpretation of the Internal Rate of Return:

The internal rate of return of the project is greater than the cost of capital of the project, so the business can accept that project. The greater IRR of the project also indicates that the cash inflows generated from the project are beneficial for the business (Lawrence, Botes, and Collins, 2013). The company should accept that project or invest in it as it is profitable for the business. The required rate of return is also 10 percent, so when the IRR of the project is compared with the required rate of the project, it is higher in contrast to the cost of capital of the company (Pogue, 2004).

Summarize Results:

By analyzing the business project with the help of the capital budgeting technique, it can be concluded that businesses should invest in this project. Investing in the new project will be beneficial for the company, and this will increase the products (Baker and Powell, 2009). The net present value of the project is also positive, and the internal rate of return is also higher than the cost of capital, which states that the project should be accepted according to both methods of capital budgeting (Linn, 2011). The planning of the business to invest in this project is favorable, and this will also increase the revenue of the business. So the final decision about the planning of the business to invest in a new project is positive: the business should invest in this project (Baker and Powell, 2009).

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  • Lawrence, R. S., Botes, V., and Collins, E. (2013). Does accounting construct the identity of firms as purely self-interested or as socially responsible?
  • Linn, M. (2011). Cost-benefit analysis: examples. Bottom Line: Managing Library Finances, 24(1), pp. 68-72.
  • Pogue, M. (2004). Investment appraisal: a new approach. Managerial Auditing Journal, 19(4), pp. 565-569.
  • Baker, K. H., and Powell, G. (2009). Understanding Financial Management: A Practical Guide. John Wiley & Sons.
  • Baker, K. H., and English, P. (2011). Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects. John Wiley & Sons.
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