3. Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. You recen

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3 Capital Budgeting Is The Process A Business Undertakes To Evaluate Potential Major Projects Or Investments You Recen 1 (115.74 KiB) Viewed 50 times

3. Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. You recently went to work for Alpha Ltd, a supplier of auto repair part used. Your boss, chief financial officer (CFO) has handed the estimated cash flow for investing new machinery. Now Alpha Ltd is considering investing in new machinery which, if purchased, would increase the production of an existing product. The new machinery under consideration would cost $510,000 and have a residual value of $60,000 after five years. The increased production would have an additional sale value of $150,000 for each of years 1, 2 and 3 and $80,000 for each of Year 4 and 5. The company has weighted average cost of capital (WACC) of 12%. 1. Calculate, for the possible investment in the new machinery, the: a. Net present value b. Internal rate of return c. Payback period d. Discounted payback period 2. Advice whether Alpha Ltd should invest in the new machinery, based on all of your calculations in part (1). 3. Evaluate why it is more appropriate to calculate the discounted payback, rather than calculating the traditional payback, when determining whether an investment project should be undertaken. 4. How do you understand capital budgeting? Are there any similarities between a firm's capital budgeting decisions and an individual's investment decision?