Written Assignment Unit 6 (BUS 5110 Managerial Accounting) Final PDF

Preview

Summary

Introduction This case study involved the investment in new equipment to evolve the manufacturing goods for the business. The capital budget analysis will determine if Option 1 or 2 is the best way to proceed and I will analyze the accounting information using NPV, IRR and Payback Period.Net Present...

Description

Introduction This case study involved the investment in new equipment to evolve the manufacturing goods for the business. The capital budget analysis will determine if Option 1 or 2 is the best way to proceed and I will analyze the accounting information using NPV, IRR and Payback Period.

Net Present Value (NPV) Basically, NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time (Fernando, 2021). According to Gallo (2014), NPV is the present value of the cash flows at the required rate of return of your project compared to your initial investment. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. NPV is the result of calculations used to find today’s value of a future stream of payments.

Internal Rate of Return (IRR) IRR is a metric used in financial analysis to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis (Fernando, 2022).

Payback Period The term payback period refers to the amount of time it takes to recover the cost of an investment. Simply put, the payback period is the length of time an investment reaches a breakeven point (Kagan, 2022).

Required Rate of Return: 8% Option 1

 $75,000 for equipment with useful life of 7 years and there is no salvage value.  Maintenance costs are expected to be $2,500 per year and increase by 3% in Year 6 and remain at that rate.  Materials in Year 1 are estimated to be $20,000 but remain constant at $10,000 per year for the remaining years.  Labor is estimated to start at $50,000 in Year 1, increasing by 3% each year after. Calculation Figure:

*Calculate internal rate of return (IRR) using Excel formula

Option 2

 $50,000 for equipment with useful life of 7 years and a $10,000 salvage value  Maintenance costs are expected to be $4,500 per year and increase by 3% in Year 6 and remain at that rate.  Materials in Year 1 are estimated to be $25,000 but remain constant at $20,000 per year for the remaining years.  Labor is estimated to start at $70,000 in Year 1, increasing by 3% each year after. Calculation Figure:

*Calculate internal rate of return (IRR) using Excel formula

Conclusion Basically, a positive NPV indicates that the projected earnings generated by a project or investment exceeds the anticipated costs (Fernando, 2021). It is assumed that an investment with a positive NPV will be profitable. On the other hand, an investment with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that only investments with positive NPV values should be considered (Gallo, 2014).

NPV divulge precisely how beneficial a project will be as compared to alternatives.

References Amy Gallo (2014) - A Refresher on Net Present Value Retrieved from https://hbr.org/2014/11/a-refresher-on-net-present-value Jason Fernando (2021) - Net Present Value (NPV) Retrieved from https://www.investopedia.com/terms/n/npv.asp Jason Fernando (2022) - Internal Rate of Return (IRR) Retrieved from https://www.investopedia.com/terms/i/irr.asp Julia Kagan (2022) - Payback Period Retrieved from https://www.investopedia.com/terms/p/paybackperiod.asp...