Capital Budgeting - Lite orange juice Project

See Table 1: Expected non-operating cash flow when the project is terminated at year 4 = 165,880$

The incremental cash flows interest us because, looking at the project from the point of the company as a whole, the incremental cash flows are the marginal benefits from the project and, as such, are the increased value to the firm from accepting the project.

A. The company needs to focus on the free cash flows instead of the accounting profits since these are the funds flow the company will receive and will be able to reinvest. By examining the cash flows they will be adapt to predict the profits and/or expenses timetable. The company’s interests in these cash flows are on an after-tax basis since they are part of the shareholders dividends. Additionally, the additional cash flows are of important, because, after analyzing the project while viewing the company as a whole, the additional cash flows are seen as minimal benefits and will show the elevated value to the company if the decision is made to implement the project.

The analysis of the financial projection in this report is based on the assumptions and the information which you (client) provided. These assumptions and information can be change with the passage of time. The

iii. Can this project be financed with current cash flow from the company? Why or why not?

Project cash flows – Evaluations of revenues, expenses, resulting cash flow, and the changes in revenues and expenses with the fulfilment of the acquisition of the capital request must be calculated and confirmed by management and the budget committee (Nowicki, 2015).

A project has initial costs of $3,000 and subsequent cash inflows in years 1 – 4 of

Answer: When determining the incremental cash flows related to the project, we should not include interest expense, even if the project will be partly financed by debt. We will take the interest cost into consideration when we perform the net present value analysis on these cash flows. At that point, the required rate of return we will use will be a rate that will take into consideration the cost of both debt and equity financing, and therefore, the effect of interest costs (and the effect of the cost of equity) will be considered at that time. Usually, the WACC will be used as the required rate of return, as long as the project is an average-risk project for the company.

She (and we) will approach the problem in five steps: 1. Determine the relevant cash flows including different possible outcomes. 2. Assess the rough financial viability of the most-likely outcome. 3. Use more sophisticated capital budgeting techniques to evaluate the project. 4. Provide quantitative measures of risks the project faces. 5 Determine how these risks affect the decision to do the project. The Time-Line of a Capital Project The first step in any capital budgeting decision is to list all the relevant cash flows. This is the hardest part of the process since it depends on having a detailed understanding of the business and requires the manager to forecast what will happen with the project in the future. It is also the most important part of the process, since if the cash flows are wrong, measures of the profitability of the project will be wrong too. Many capital projects have a similar structure: An initial investment by a firm, followed by a number of periods of regular cash inflow, followed by a terminal payment that ends the project. Our methods of evaluating projects don’t depend on this structure, but it can be helpful to think of a project this way when determining cash flows in order to be sure that you don’t forget any beginning or ending payments or costs. Nancy’s project has this kind of structure. The plan is for Digital Solutions to use its own software engineers and some temporary contract workers to develop

i) An initial cash reserve is needed for each project. It will be paid back at the end of year 20.

| An increase in NWC is treated as a cash inflow in capital budgeting cash flow estimation.Answer

If the manufacturer plans on using debt to finance the project, should the estimated project cash flows be changed to reflect these interest charges? Why or why not?

In this case, Crosby Sanberg and his team calculated cash flows by using payback period and ROFE method. Crosby and his team further provided the limitations and problems that are inherent in using incremental ROFE and payback and provide a rationale for adopting new techniques. After providing the Alternative techniques, they concluded that the incremental basis for evaluating the project is inadequate measure of project’s worth when existing facilities with a known future use will be utilized extensively. This was also concluded that overheads increase in proportion to the size and complexity of the business and provides the best long-rage projections of the financial consequences based upon the fully allocated

In order to assess the viability of the project, only relevant figures provided by financial accountants are included in calculations. Furthermore, additional information obtained during meetings with senior managers have been considered.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).