INTRODUCTION ABOUT CAPITAL BUDGETING PROJECT
Capital budgeting is that technique which is used to determine that whether the investment by the organization is valuable for them or not. In the current report a business is planning to invest in some new assignments which is valuable for the business to increase in its manufacturing of products. This project will increase the production of the company, but company wants to evaluate that whether the project will bring the sufficient revenue for the business or not. To evaluate the project for company cash inflows and discounting rate for the project is considered.
Time line and estimated cash flow of the project along with inflow of cash from the project.
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 inflow for years and the estimated cash flows are detailed below.
Interest rate for the discounting and required rate of return for the investment:
In this current project the business has determined the rate of the discounting factor is at 10%. This discount rate will determine the future cash flow of the company at present value.
Net Present Value and Internal Rate of Return:
Net Present Value of the Project is positive which states that it is profitable for the company if they make investment in this project. If the discounting rate 10 percent is considered for the project than 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 that 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 with the future value of time.
Interpretation of Internal Rate of Return:
Internal rate of return of the project is greater than the cost of capital of project, so the business can accept that project. Greater IRR of the project also indicates that the cash inflows which are generated from the project are beneficial for the business (Lawrence, Botes, and Collins, 2013). Company should accept that project or invest in that project as it is profitable for the business. Required rate of the return is also 10 percent, so when the IRR of the project is compared with the required rate of project it is higher in contrast to cost of capital of the company (Pogue, 2004).
By analyzing the project of business with the help of capital budgeting technique it can be concluded that business 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). Net present value of the project is also positive and internal rate of return is also higher than the cost of capital which states that project should be accepted according to both the methods of capital budgeting (Linn, 2011). 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 new project is positive that business should invest in this project (Baker and Powell, 2009).
- 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.