Scribd Logo
Upload

Welcome to Scribd!

  • 35 views

    Assignment - Capital Budgeting 2

    Uploaded by

    Roschelle Miguel
    The document summarizes two capital budgeting challenges. The first involves calculating the NPV and payback period for a new movie camera purchase. The NPV is positive at $6,200.36 and the payback period is 6.976 years. The second challenge evaluates a packaging machine purchase with a negative NPV of $766.10, profitability index of 0.995, and payback period of 6.11 years, making it quantitatively unacceptable but possibly desirable if qualitative factors are considered.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Assignment - Capital Budgeting 2

    Uploaded by

    Roschelle Miguel
    35 views3 pages
    The document summarizes two capital budgeting challenges. The first involves calculating the NPV and payback period for a new movie camera purchase. The NPV is positive at $6,200.36 and the payback period is 6.976 years. The second challenge evaluates a packaging machine purchase with a negative NPV of $766.10, profitability index of 0.995, and payback period of 6.11 years, making it quantitatively unacceptable but possibly desirable if qualitative factors are considered.

    Original Description:

    Original Title

    Assignment - Capital Budgeting 2,

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document summarizes two capital budgeting challenges. The first involves calculating the NPV and payback period for a new movie camera purchase. The NPV is positive at $6,200.36 and the payback period is 6.976 years. The second challenge evaluates a packaging machine purchase with a negative NPV of $766.10, profitability index of 0.995, and payback period of 6.11 years, making it quantitatively unacceptable but possibly desirable if qualitative factors are considered.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    35 views3 pages

    Assignment - Capital Budgeting 2

    Uploaded by

    Roschelle Miguel
    The document summarizes two capital budgeting challenges. The first involves calculating the NPV and payback period for a new movie camera purchase. The NPV is positive at $6,200.36 and the payback period is 6.976 years. The second challenge evaluates a packaging machine purchase with a negative NPV of $766.10, profitability index of 0.995, and payback period of 6.11 years, making it quantitatively unacceptable but possibly desirable if qualitative factors are considered.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    CAPITAL BUDGETING 2

    Challenge #1 (10 points)


    Bernard Productions, a motion picture producer, is considering the purchase of a new movie camera.
    The new camera will cost P30,000, have an eight-year life, and create cost savings of P5,000 per
    year. However, the new camera will acquire P700 of maintenance each year. The company uses a
    discount rate of 9 percent.

    Required:
    a.) Compute the net present value of new camera.

    Solution:

    Cost savings per year P5,000


    Maintenance per year (700)
    Net cash flows per year P4,300

    Cash Discount Factor Present Value


    P30,000 1.0000 P(30,000.00)
    4,300 5.5348 23,799.64

    Net Present Value of New Camera = P(6,200.36)

    b.) Determine the payback period.

    Solution:

    P 30,000
    Payback Period = = 6.976 years
    P 4,300

    Challenge #2 (20 points)


    Priscila Eunice Co. is interested in purchasing a state-of-the-art packaging machine for its
    manufacturing plant. The new machine has been designed to basically eliminate all errors and
    defects in the production process. The new machine will cost P150,000, and have a salvage value of
    P70,000 at the end of its seven-year useful life. Priscila Eunice has determined that cash inflows for
    years 1 through 7 will be as follows: P32,000; P57,000; P15,000; P28,000; P16,000; and P15,000
    respectively. Maintenance will be required in years 3 and 6 and at P10,000 and P7,000 respectively.
    Priscila Eunice uses a discount rate of 11 percent and wants projects to have a payback period of no
    longer than 5 years.

    Required:
    a.) Compute the net present value of the new machine.

    Solution:

    Year Cash Flow Discount Factor Present Value

    1 P150,000 1.0000 P(150,000.00)


    1 32,000 .9009 28,828,80
    2 57,000 .8116 46,261.20
    3 5,000 .7312 3,656.00
    4 28,000 .6587 18,443.60
    5 16,000 .5935 9,496.00
    6 3,000 .5346 1,603.80
    7 15,000 .4817 7,225.50
    7 70,000 .4817 33,719.00

    Net Present Value of the new machine = P (766.10)

    b.) Compute the firm’s profitability index.

    Solution:

    Present Value of cash flows


    Profitability Index =
    Investment

    P 149,233.90
    Profitability Index = = 0.995
    P 150,000

    c.) Compute the payback period.


    Solution:

    Year Cash Flow Cumulative Cash Flow

    1 P32,000 P32,000

    2 57,000 89,000

    3 5,000 94,000

    4 28,000 122,000

    5 16,000 138,000

    6 3,000 141,000

    7 85,000 226,000

    P150,000 – P141,000 = P9,000/P85,000 = .11

    Payback Period = 6.11 years

    d.) Evaluate this investment proposal for Priscila Eunice Co.

    - This investment proposal for Priscila Eunice Co. is quantitatively unacceptable as it has a
    negative net present value which is P(766.10), a less than one profitability index which is
    0.995, and a payback of over six years which is 6.11 years. Although, the net present value
    and profitability index are very close to being acceptable. Because the new machine, the state-
    of-the-art packaging machine will help Priscila Eunice Co. eliminate all errors and defects in
    the production process, the investment may be desirable if they will consider additional
    qualitative factors such as focusing and improvement in areas of product quality, company
    reputation, customer satisfaction, competitive position, goodwill generated, and a goal to be in
    the forefront of manufacturing capability. Priscila Eunice Co. may want to attempt to consider
    and quantify these benefits and reassess the acceptability of the machine as an investment.

    You might also like