View attachments to see this response in context with the calculations. Capital budgeting is one of the most important financial tools that are used by an organization. Capital budgeting analyzes the investments available to a company, and assists them in determining which investments to undertake.
View attachments to see this response in context with the calculations. Capital budgeting is one of the most important financial tools that are used by an organization.
Capital budgeting analyzes the investments available to a company, and assists them in determining which investments to undertake. There are several methods through which the capital decision is analyzed, one of the best methods for evaluating the net present value.
Net Present Value Method: Each of the cash flows have a different present value, as they take place in different years.
The NPV calculations are determined Guillermo furniture using the cost of capital for the organization. Forecasted cash flows need to be made with realistic assumptions.
Once you have the cash flow during each period and discounted correctly, the sum of the net present value of future cash flows is compared Guillermo furniture the initial investment required.
If you subtract the initial investment from the net present value and the amount is positive, the investment should be accepted. Internal Rate of Return: This is the rate at which the net present value NPV of a project is equal to zero. If the IRR is greater than the cost of capital, then the company should accept the project; if the IRR is less than the cost of capital the project should be rejected.
Many business experts caution at using IRR as the primary means of evaluating an investment. The IRR is difficult to use because the cost of capital is determined by market conditions.
The assumptions of IRR reinvestment also lead to distortions of the economic reality of the situation. It is also very difficult to make a mutually exclusive investment decision simply based on IRR alone. If the cost of capital is used, the IRR of the project can fall considerably.
It is always advisable to use Net Present value in evaluating a project and IRR should not be used as it can be misleading at times. The profitability index is the ratio of the present value of cash inflows at the required rate of return, to the initial cash outflow.
It is accepted if the PI is greater than one. The net present value calculation is the total present value of a time series of cash flows.
For this we require the time period and a discount rate. In this problem, I have selected twenty years because it helps us capture the effect of the building being fully depreciated for the current business. The span of 20 years also captures the effect of the equipment being fully depreciated in case of hi-tech and broker business.
First, we subtract the income tax from the net profit. Then we add back the depreciation charged. In case of current business, the problem mentions that the building has been depreciated for 13 years, in other words it must be depreciated for 17 years more.Guillermo's Furniture Store Cresia Davis University of Phoenix Corporate Finance GA08MBA04 Mario Ducret May 12, Guillermo's Furniture Store Scenario.
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and NO SALES TAX. Guillermo Furniture, a company that manufactures mid-grade and high-end sofas, has just hired you as an accountant. The owner, Guillermo Navallez, has assigned you the tasks of determining which decisions provide the greatest. Guillermo Furniture Store Analysis You are the analyst for Guillermo Furniture Store.
You have been asked to revise the Flex Budget using Excel for the Store. Assume Guillermo continues doing . Guillermo Furniture, a company that manufactures mid-grade and high-end sofas, has just hired you as an accountant.
The owner, Guillermo Navallez, has assigned you the tasks of determining which decisions provide the greatest.
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