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Finance Capital Budgeting

This paper offers a discussion regarding capital budgeting. Investment projects are analyzed to determine whether it is feasible for the corporation to invest in them or to shelve any such plans. There is a case study that has been given which is subject to analysis. The subject case involves TVS Container Corporation. This is a company that was started in the year 1978 and has engaged in the business of manufacturing plastic injunction molded products. The company is said to have encountered financial and market challenges. It is indicated, that its levels of sales have diminished lately. It has also been outsmarted by its rivals in the market.

The management of the corporation, has had a heated meeting regarding the route to be taken by the organization as far as its investment priorities are concerned. At hand, are three projects that require analysis to determine the viable one 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 corporation. To establish this, the corporation has undertaken the initiative to conduct the exercise. From the results, Project B has been selected.

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 title of the case would be investment appraisal given that three different projects are given for appraisal to determine their viability. 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).

All the information has been given. The initial capital expenditure for each project has been given at 500,000. The rate of return is 16 per cent, 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 Value. The summation of the Net Operating Incomes then provides the Present Value of  project (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 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.

From the results as depicted in the excel spreadsheet, Project C is the better 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, analysis of investment projects can therefore guide in investment decisions (Varshney, 2010).

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