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Module 12: Critical Thinking ) Capital Investment Analysis(

Post ID: 3280589

Overview

Module 12: Critical Thinking ) Capital Investment Analysis(

The management team of Lisa’s Linens & Furniture is considering the following capital projects:

Project

Cost (SAR)

Annual cash flows (SAR)

Years

New manufacturing plant

2,000,000

310,000

13

Machinery

320,000

80,000

6

Leasehold improvements

500,000

118,000

8

Computers

178,000

497,000

3

Office furniture

114,000

392,000

2

Company plan

800,000

230,000

5

Company car

240,000

77,000

3

Assume that each project has no salvage value, and the firm uses a discount rate of 10%. Top management has decided that only SAR 2,200,000 can be spent in the current year for capital projects.

1. For each of the projects, compute the net present value (round to two decimal points), profitability index (round to three decimal points), and internal rate of return (round to two decimal points).

Discount Rate: 10%

2. Rank the projects according to each method used in Part 1.

3. Explain how you would recommend to management of the company that the money should be spent. What would be the total NPV of your chosen investments?

4. Would your answer to Part 3 be different if there was no limit to capital spending? Explain.

This module introduces the concept of capital investment analysis, and you will learn its foundations and models.

Learning Outcomes

  1. Examine the relation of capital investment analysis to the management process.
  2. Solve capital investment evaluations including using net present value and internal rate of return.
  3. Evaluate payback calculations and accounting rate of return.
  4. Distinguish factors that can impact the capital budgeting process.

Readings

Required:

Recommended: