Resourcecapital Budgeting Techniques Grading Guidepurpose Of Assignme ✓ Solved

The purpose of this assignment is for students to employ capital budgeting techniques using time value of money concepts to determine the acceptability of large dollar value assets. Create a 350-word Microsoft® Excel® document addressing the following:

  • Determine the Discounted Cash Flow (DCF) value of the firm.

  • Recommend acceptance of this project using net present value criteria.

  • Display your calculations.

Format assignment consistent with APA guidelines.

Paper For Above Instructions

Capital budgeting is critical in evaluating potential investments in large assets. Companies primarily rely on time value-of-money concepts, such as Discounted Cash Flow (DCF) analysis, to determine the acceptability of such investments. This analysis can guide strategic investment decisions and ensure the firm maintains strong financial health.

The scenario provides projected free cash flows for a firm as follows: $575,000 for Year 1, $625,000 for Year 2, and $750,000 for Year 3. Additionally, a projected terminal value of $8,000,000 at the end of Year 3 and a Weighted Average Cost of Capital (WACC) of 12.5% are given. To assess the value of the project, we will calculate the DCF and derive the Net Present Value (NPV).

First, we calculate the present value of the projected cash flows for the first three years:

Using the formula for the present value (PV), we get:

  • PV of Year 1 = Cash Flow Year 1 / (1 + r)^n = $575,000 / (1 + 0.125)^1 = $575,000 / 1.125 = $511,111.11

  • PV of Year 2 = Cash Flow Year 2 / (1 + r)^n = $625,000 / (1 + 0.125)^2 = $625,000 / 1.265625 = $493,827.16

  • PV of Year 3 = Cash Flow Year 3 / (1 + r)^n = $750,000 / (1 + 0.125)^3 = $750,000 / 1.423828125 = $526,929.30

Next, we calculate the present value of the terminal value:

  • PV of Terminal Value = Terminal Value / (1 + r)^n = $8,000,000 / (1 + 0.125)^3 = $8,000,000 / 1.423828125 = $5,619,031.89

Now we can sum the present values to get the total DCF value:

Total DCF Value = PV Year 1 + PV Year 2 + PV Year 3 + PV Terminal Value

Total DCF Value = $511,111.11 + $493,827.16 + $526,929.30 + $5,619,031.89 = $6,150,899.46

Having calculated the DCF, we will now assess the investment's acceptability through the Net Present Value (NPV) criterion. The NPV is defined as the total DCF value minus the initial investment (if applicable). If the NPV is greater than zero, it is an acceptable project.

In this case, if we assume the required initial investment is less than the total DCF value of $6,150,899.46, then the NPV will be positive, thereby suggesting acceptance of the project. If, however, the initial investment were to exceed this amount, further analysis would be needed to reconsider the potential viability of this investment.

In conclusion, through our calculations, we have determined that the DCF value of the project is approximately $6,150,899.46. Based on traditional NPV criteria, we recommend acceptance of this project, assuming the initial investment is less than the calculated DCF value. It is crucial for firms to ensure an informed approach towards capital budgeting in today’s dynamic market landscape.

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