Determining A Capital Budgeting Plan Essay

Determining A Capital Budgeting Plan Essay

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The first step in determining a capital budgeting plan is estimate the future revenue and expenses, which includes driver costs, repairs, and maintenance for the buses and miscellaneous other expenses. After taking the income and deducting the expenses, the cash flow per year (or period) can be established, however, due to the time value of money these future figures need to be readjusted for their Present Value. Utilizing the Present Value formula, take Year 1 as an example; PV is what is being solved for, and FV is the future value expecting to have, which in this case would be the cash inflow for this period ($159,000.00). For the denominator, the r stands for rate, which in this case was taken from the weighted average cost of capital, which can be viewed as a type of interest on the money, is given as 10.5 percent. The exponent is a particular time, therefore, for year 1, t=1 and for year 2, t=2 and so on and so forth. Now the figures can be added up to give the Net Present Value. By adding all of these values together, from year 0 to year 5, the investment made today is compared to the future cash inflow amounts, after being discounted to present value, to determine whether this project would be a suitable investment. An investment with a positive NPV is considered to be an acceptable investment, because it indicates an increase in cash flow, while a negative NPV serves as an indicator that this project is likely to result in losses. Instead of utilizing the NPV to evaluate a project, companies can also use the Internal Rate of Return, or IRR, of an investment. Although NPV and IRR are closely related, IRR is the rate, r in the formula, at which the NPV would become equal to zero. It has been found that nearly three-quarters...

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...ement. The variable elements of capital budgeting all hold value in the process and each carries with it levels of risk as well as the consequence when ignored. The examination of capital budgeting and cash flow systems shows the variety of ways projections can be analyzed and assessed in regards to cost and the generation of wealth. Additionally, while these factors are important and powerful forecast tools, they are not mandated and can, in various circumstances, drastically change the cash flow system through the actualization of risk into catastrophe. For this reason, capital budgeting, and cash flow systems, alongside their projected figures of analysis, also be drawn in consideration to how to mitigate, avoid, and compensate for risk. With the concepts addressed in the former, more sound decisions made in regards to proposed projects and financial endeavors.

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