CAPITAL APPRAISAL

Capital Appraisal

Capital Appraisal

1) Newton Electronics Ltd has incurred expenditure of $5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed and the directors of the company are considering which of three mutually exclusive options should be taken, commencing at the start of 2011, to exploit the potential of the new product.

year

no. of units

Inflows

outflow

net cash flow

0

2011

800

30

424.4

-394.4

2012

1400

22

312.4

-290.4

2013

1800

22

312.4

-290.4

2014

1200

22

312.4

-290.4

2015

500

20

284.4

-264.4

NPV

($50.95)

The first year revenue would be R1 = $800,000For the years Yi (i=2 to 5)Ri = $57,00. For each year the direct costs are 14*Ri.

After apply NPV formula we get the value of NPV = $50.95

This project is accepted as NPV is positive. The investment in this project is good for organization.

2) Financial statements have been explained and Newton Electronics Ltd have been able to complete them for their own operation, the module tells how they all fit together and can be used in evaluating in their farming operation. These financial statements are an essential part of loan applications and business plans, and will be used by lenders to make credit decisions about their operation. Budgets are plans for the future. Managers are able to monitor budgets in order to spot variances and make ongoing adjustments to plans. Financial statements such as the profit and loss account and the balance sheet provide information about past performance. These statements can be compared with the results achieved by similar companies or in previous time periods to identify areas for improvement. For example, if a firm spots that its cost of sales is higher than those of a rival it may seek to switch to an alternative supplier, or take other actions such as reducing direct costs.

Financial information provides invaluable statistics and evidence on which managers can make informed decisions and plans.

3) As NPV is a significant approach for Capital Appraisal. An approach used in capital budgeting where the present value of cash inflows is subtracted by the present value of cash outflows. NPV is used to analyze the profitability of an investment or project. NPV compares the value of a dollar today versus the value of that same dollar in the future, after taking inflation and return into account. If the NPV of a prospective project is positive, then it should be accepted. However, if it is negative, then the project probably should be rejected because cash flows are negative.

In order to calculate the net present value of the Company Project, we have to calculate the discounted cash flows firstly.

From the calculated value of NPV, we can say that the project has a positive return as NPV is positive. The project would result in increasing the profitability of the company according to the NPV results.

The Net Present Value (NPV) is the first Discounted Cash Flow (NPV) technique covered here. It relies on the concept of opportunity cost to place a value on cash inflows arising from capital investment.

Remember that opportunity cost is the calculation of what is sacrificed or foregone as a ...