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The assignment is about the acceptability of the different accounting tools like IRR, Payback period, NPV.etc.
The company wants to carry out IRR and NPV of the capital project. The merits of the company’s capital budgeting procedure are as described as follows:
Payback period is generally wastage of time because when any alternative project is not available, it becomes difficult to decide the acceptability of the project (Bertoni, Colombo & Croce2010).
DCF is used because it helps to find out in which year the company will totally recover the investment.
When a particular project is evaluated, it is important to make a calculation of the cash flows. Depreciation is not considered important. Depreciation method will help to evaluate the differentiated value of the project after deducting the cost of the project taken.
Whenever the cash flow of the project is taken into consideration, it will give a clear idea of the total expenses that the company has to incur to deliver the required rate of results from the particular investment. Total cash amount invested from different range of activities will determine the expenses incurred. While receiving the return, the return figure will be tallied with the invested amount to find out the profitability or loss (Jackson, Rodgers & Tuttle 2010).
While carrying out a particular project, there are some cash expenses that are to be considered. Interest expenses are one of such. Interest expenditures mean the money borrowed by the company. Borrowed money strengthen the rate of investment, hence it needs to be considered important (Barrow & Barrow 2008).
The expenditure of the company will include the borrowed money. The organization has to return the borrowed money along with interest, therefore inclusion of the interest expenses is important. When return from the investment will be received, the company will be paying it back from the profit earned. That is why in cash flows, interest expenses needs to be included.
NPV of the project is:
NPV= R*1-(1+i)-n/I – Initial investment
R= Net Cash Inflow
I= required rate of return
N= Number of years
By applying the formula,
NPV= $360*1(1+0.10)-5/10- $300
= $360 (1.10) - 0.5 - $300
= $ 396- 0.5-$300
= $396.5- $300
So, the NPV of the project is $95.5 million.
The different statements have been discussed. The NPV of the project undertaken by the company has been calculated for the company concerned.
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