Free Capital Budgeting Analysis Essay Sample
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The cash flows at the start
The capital ($756500) which was already invested in R&D, will going to be included in cash flow at the start or not will depend on the policies of the company but the other costs are definitely going to include. The first investment will be $970,000 for new specialised equipment, $710,000 for stainless steel wine vats and the marketing cost will be $550,000. The extra cost will include $465,000 for side materials and $62500 which they will not get from the farmer by leasing their paddock. Initial cost for the advertisement will be $375,000.
The cash flows over the life
Once project started then the main cash flow will be in the form of employer's salary which mainly include of supervisor ($100,000) and his 4 helpers ($188,000). In case of finance from the bank $260,000 will go as interest and principle per year. Maintenance of the equipment will take nearly $63,000 per year for first five year and $102,000 for the next 5 year. Every year they will also lose money from the lease of paddock. If we see at the sale side then it will be $260,000 for first two years, $820,000 for the next two year, $1,050,000 in fifth year and $1,120,000 in the later years. The advertisement cost will be $310,000 for the second, third and fourth year while for the later years it would be $250,000.
The cash flows at the end
At the end of the project there will be no major money flow. The earning will be of $126,000 by selling equipment and $6000 by scrapping vats.
The appropriate discount rate
According to the suggestions of the directors the appropriate discount rate should be 17%.
The NPV of the project
After all investments the NPV of the project will be $3,513,500.
According to the data given, the project will be beneficial.