ASSIGNMENT

Assignment



Assignment

Task 1

Project A should be chosen as the NPV of project A is greater than that of project B. As per the calculations attached in excel sheet, we can easily say that project A is the most suitable one for Chevron Texaco. We have analyzed the given cash flows of two projects using techniques such as Net Present Value (NPV), payback period and Internal Rate of Return (IRR). The reason for analyzing two projects by multiple techniques is to increase the reliability and authenticity of our forecast. From the following table, we can easily see that Net Present Value of Project A is greater than that of Project B. We accept the project having highest value of NPV because higher the NPV, greater would be the returns and profitability of the project.

Year

Project 1

Project 2

0

-£250,000

-£350,000

1

£70,000

£75,000

2

£74,250

£79,250

3

£78,713

£83,713

4

£83,398

£88,398

5

£88,318

£93,318

6

£48,484

£93,484

7

£88,908

£98,908

8

£94,604

£104,604

9

£95,584

£100,584

10

£96,863

£156,863

CoC

14%

14%

IRR

28%

22%

NPV

£219,041.67

(£200,318.94)

Payback

3.57

4.67

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.

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 Chevron Texaco 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. (Rappaport 2006 140)

Remember that opportunity cost is the calculation of what is sacrificed or foregone as a result of a particular decision. It is also referred to as the 'real' cost of taking some action. We can look at the concept of present value as being the cash equivalent now of a sum receivable at a later date. So how does the opportunity cost affect revenues that we can expect to receive later? Well, imagine what a business could do now with the cash sums it must wait some time to receive.

In fact, if you receive cash you are quite likely to save it and put it in the bank. So what a business sacrifices by having to wait for the cash inflows is the interest lost on the sum that would have been saved. (Narayan 2009 103-17)

The results of IRR are totally compatible for that of NPV i.e. Project B should be accepted in any case whether we concentrate on NPV or IRR. IRR is an alternative method to evaluate software investments. Similar to NPV calculations, IRR takes into account the time value of money by considering the cash flows over the lifetime of a project. IRR analyses simplify part of the NPV calculation ...