Capital Budgeting, Time Value of Money, and Cost-Benefit Analysis

Capital Budgeting, Time Value of Money, and Cost-Benefit Analysis

Analysis of Project A

Option A

 

 

 

Year 0

Capital Cost ($)

Operating and Maintenance Cost ($)

Benefits ($)

Year 1

$ 2,000,000.00

$ 0.00

$ 0.00

Year 2

$ 1,000,000.00

$ 10,000.00

$ 0.00

Year 3

$ 500,000.00

$ 70,000.00

$ 120,000.00

Year 4

 

$ 90,000.00

$ 600,000.00

Year 5

 

$ 90,000.00

$ 800,000.00

Year 6

 

$ 90,000.00

$ 800,000.00

Year 7

 

$ 90,000.00

$ 800,000.00

Year 8

 

$ 90,000.00

$ 800,000.00

Year 9

 

$ 100,000.00

$ 800,000.00

Year 10

 

$ 100,000.00

$ 500,000.00

 

 

 

 

 

Net Cash Flow

DCF (Investment)

DCF

Payback Period (Investment)

Payback Period (Cumulative Remaining)

$ 0.00

$ 1,818,182.00

$ 0.00

-$ 2,000,000.00

 

-$ 10,000.00

$ 826,446.28

-$ 8,264.00

-$ 3,000,000.00

-$ 3,010,000.00

$ 50,000.00

$ 375,657.40

$ 37,566.00

-$ 3,500,000.00

-$ 3,450,000.00

$ 510,000.00

 

$ 348,336.86

 

-$ 2,940,000.00

$ 710,000.00

 

$ 440,854.00

 

-$ 2,230,000.00

$ 710,000.00

 

$ 400,776.00

 

-$ 1,520,000.00

$ 710,000.00

 

$ 364,342.26

 

-$ 810,000.00

$ 710,000.00

 

$ 331,220.00

 

-$ 100,000.00

$ 700,000.00

 

$ 296,868.00

 

$ 600,000.00

$ 400,000.00

 

$ 154,217.32

 

 

$ 3,020,285

$ 2365916.922

Investment Measures

Payback Period for Option A

{8 years + [(600,000/700,000)*12]}

[8 years +10 months]

8.10 years

Net Present Value for Option A

NPV= Inflow - Outflow

$(654,369)

Internal Rate of Return for Option A

IRR= -3.62%

Interpretation of the Option 'A' - Analysis

The analysis of Option 'A' is based on presenting the Audience of City Council Members with appropriation of their investment analysis. The methods used for the calculation includes three basic concept of capital budgeting, time value of money, and cost benefit analysis. The possibility of the solution came from using these three methods and tools to find out three major objectives analyzing the investment analysis in the project of option A. In addition, the analysis includes calculating the total Payback Period for the investment, calculating the Net Present Value for the investment, which will suggest about the feasibility of the project. Moreover, the calculation includes Internal Rate of Return for the project option A analysis.

Net present Value for Option A

The initial step for the investment started from identifying the Net Present Value NPV for the option A. For calculating NPV, the solution is based on firstly calculating the net cash flows for the purpose of discounting the model to identify the discounted cash flow, which were assumed on a discount rate of 10%. Moreover, the discounted cash flow was calculated for the separately for the three year investments and for the net cash flows. After calculating the DCF and summing all the DCF's we subtracted with the amount of DCF of investment, which was the total outflow. The NPV for option A represented a negative value, which is however not extensively appropriate for conducting the project.

Internal Rate of Return for Option A

The internal rate of return is acquired by keeping the NPV=0 for the option A, The IRR for the project is -3.62% as the NPV for the project is negative. Hence, the IRR is also negative for the project.

Payback Period for Option A

After calculating the amounts of DCF, we were able to analyze the payback period for option. The payback period for the project was 8 years and 10 months, in which the company will be done over with paying the full investments and free itself from outflows in terms of investments.

Analysis of Project B

Option B

Year 0

Capital Cost

Operating and Maintenance Cost

Benefits

Year 1

$ 2,500,000.00

$ 0.00

$ 0.00

Year 2

$ 500,000.00

$ 50,000.00

$ 750,000.00

Year 3

 

$ 100,000.00

$ 750,000.00

Year 4

 

$ ...