# Capital budgeting clarification example

The number of years n equals four since identical cash flows occur each year for four years. Answer — d All cell references are to the following spreadsheet shown.

### Capital budgeting clarification example

Illustration: Mr. The term cash flow refers to the amount of cash received or paid at a specific point in time. In lacs 1 NPV 12 14 2 Profitability index 1. See the example that follows. We know from Figure 8. Find the NPV of this investment using the format presented in Figure 8. Cash flow projections must include adjustments for inflation to match the required rate of return, which already factor in inflation. What is the rate of interest to the firm? With both of these approaches, there are several important issues that must be considered. The depreciation taken on the asset in future periods is not a cash flow and is not included in the NPV and IRR calculations. Because the net present value NPV is positive, the required rate of return has been met. Question: We use two methods to evaluate long-term investments, both of which consider the time value of money. In comparing projects for possible authorization, companies use a profitability index. Most companies' required rate of return is their cost of capital.

The annualized interest cost of not availing the cash discount is a Managers and decision makers must also consider qualitative factors.

What is the rate of interest to the firm? Note that the review problem at the end of this segment provides an example of how to calculate the payback period to the nearest month when uneven cash flows are expected. In the first two years, revenues are low and depreciation charges are high, resulting in significantly lower overall company net income than if the project were rejected. The financial results are typically measured using financial accounting data prepared on an accrual basis. Notice that the resulting IRR of Cash balance expected to be Rs. The far right side of Figure 8.

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