Kjhklh Essay

960 Words4 Pages
QUESTIONS 1. Table 1 contains the complete cash flow analysis based on GP Manufacturing’s basic information. Explain the inputs into 1) the net initial investment outlay at year 0, 2) the depreciation tax savings in each year of the project’s economic life, and 3) the project’s incremental cash flows? 2. What is the project’s NPV? Explain the economic rationale behind the NPV. Could the NPV of this particular project be different for GP Manufacturing than for one of Chino Material Systems Inc.’s other potential customers? Explain. NPV = $205,761 By using Net Present Value, investors can determine the expected profitability of a project. No, NPV would be the same for everyone since it is basically just an estimate of future cash flows. 3. Calculate the proposed project’s IRR. Explain the rationale for using the IRR to evaluate capital investment projects. Could the IRR for this project differ for GP Manufacturing versus for another customer? IRR = 14.42% Internal Rate of Return is a measurement that investors use to decide whether or not they should pursue a project. The IRR would need to be greater than the required rate of return to do the project. This figure definitely could be different for different customers. 4. Suppose one of GP Manufacturing’s executives typically uses the payback as a primary capital budgeting decision tool and wants some payback information. a. What is the project’s payback period? 4.28 years b. What is the rationale behind the use of payback as a project evaluation tool? A project’s payback period lets investors know how long it will take to make their initial investment back. This determines the point in which a profit begins to be turned. c. What deficiencies does payback have as a capital budgeting decision method? d. Does payback provide any useful information regarding capital budgeting decisions? e.

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