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Finance Capital Budgeting 2

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This paper provides a discussion regarding capital budgeting. The appropriate title for this assignment is Investment Appraisal. This is because, it entails the analysis of different investment projects to determine their viability before any commitment is made. All the cash flows accruing to the Corporation are discounted at the given rate for analysis. Investment projects have been given for analysis to determine whether they are feasible for the corporation to invest in them or to shelve any such plans. A case study that has been given is subject to the analysis. The subject case involves TVS Container Corporation. This company was started in the year 1978. It engages in the business of manufacturing plastic injunction molded products. The company is said to be facing challenges. These are mainly financial and market based. It is indicated too, that its levels of sales have diminished lately. Its rivals in the market have also overshadowed it. This is in terms of the market share it commands.

The management of the Corporation has had a heated meeting regarding the route to be taken by the organization regarding the investment priorities and the performance of the organization. At hand, are three projects that require analysis to determine the most viable for investment by the Corporation. The management is keen to invest in a feasible project due to the need to avoid any further loss to the business enterprise. To establish this, the Corporation has undertaken the initiative to conduct the exercise. From the officer mandated to handle the assignment, Project B is considered the best option.

The aim of this section is to justify whether the results are correct as presented. To attain the answers sought concerning the assignment, investment appraisal methods are employed to arrive at a conclusion. The appropriate method selected for the exercise is the use of the Present Value approach. This method discounts future incomes accruing to the corporation to achieve the results sought (O'Sullivan & Steven, 2003). The Present Value of incomes is summed. Any costs are also discounted. The difference between the incomes and expenses constitutes the Net Present Value. This constitutes the worth of a project for some certain period.

All the information has been given. The initial capital expenditure for each project is approximated to be $500,000. The rate of return is 16 per cent per annum, the life of the projects at 5 years, depreciation at 20 per cent per annum. The cash flows to the Corporation are given at varying rates. In computation of the Present Values, the rate of return is used as the discount rate. Present Values of each cash flow are added to attain the Present Value of each project. The tax rate is also given at 25 per cent. To attain the Net Operating Income, taxes accruing at 25% are deducted from the yearly Present Values. The summation of the Net Present Values then provides the worthiness of the project under consideration (Pratt & Reilly, 2000). In the computation of the Present Values for the three projects, depreciation is given at 20 per cent. For a period of five years, depreciation would be 500,000, which is equal to the amount of the initial capital outlay. The value of each machinery at the end of five years would thereby be zero. Therefore, there is no element of salvage value in the three projects.

From the results as depicted on the excel spreadsheet, Project C is the best one since it has the highest Present Value. Project A has a Present Value of  -242,838, B -243,422 and C -209,207. It is therefore incorrect to indicate that project B is better than the rest. Project B is in fact the worst since it has the lowest Present Value. The Corporation would suffer the highest loss if it invests in Project B.

From the above results, as contained in the excel spreadsheet, the Present Values for all the projects are negatives. The Corporation is hereby advised not to invest any funds in the project since that would amount to losses. No return would be earned from the projects. The Corporation should explore other avenues for investment instead of wasting resources in such projects. By using valuation tools, the Net Present Value approach, analysis of investment projects can therefore guide in investment decisions (Varshney, 2010). The information from the calculations means that the costs of investing in the projects is higher than the incomes to be earned.

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