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Capital Budgeting Decisions With Uncertain Cash Flow

Capital Budgeting Decisions With Uncertain Cash Flow

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Published by Kanti nath Banerjee

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Published by: Kanti nath Banerjee on Sep 27, 2012
Copyright:Attribution Non-commercial

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05/13/2014

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C
APITAL 
 
BUDGETING
 
DECISIONS
 
 WITH
 
UNCERTAIN
 
CASH
 
FLOW 
 
It is generally assumed that all the future cashflows are known with certainty,but future cash flows are oftenuncertain or difficult to estimate.
 A number of techniques are available forhandling this complication much of them are tootechnical involving computer simulations andadvanced mathematical skills
 
EXAMPLE 
:1
Consider the case of investments in automatedequipment.Suppose:discount rate = 12%no. of years =10 andthe discounted cash flow analysis of thetangible costs and benefits shows a negative net present value of $226,000.In this case, the amount of additional cash flow needed to make the project financially attractivecan be computed as follows:
 
Net present value excluding the intangible benefits$(226,0 00)Present value factor for an annuity at 12% for 10 years( Future Value and Present Value)5.650Negative net present value = $226,000 / Present value factor (5.650)= $40,000

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