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 1. Net present value.

End of Year Cash Flow END YEAR CASHFLOW PVIF PV

0  $       (404,424) 0 -404,424 1 -404424
1  $            86,890 1 86890 0.877193 76219.29825
2  $          106,474 2 106674 0.769468 82082.17913
3  $            91,612 3 91612 0.674972 61835.49054
4  $            84,801 4 84801 0.59208 50208.9996
5  $            84,801 5 84801 0.519369 44042.98211
6  $            75,400 6 75400 0.455587 34351.2257
7  $            66,000 7 66000 0.399637 26376.06329
8  $            92,400 8 92400 0.350559 32391.65667
NPV 3083.895278

The project is acceptable because the dollar amount of the net present value is positive.

2. Why does the net present value method favor larger projects over smaller ones when

used to choose mutually exclusive projects? Is this a problem?

Since NPV generates a dollar sum, projects with greater dollar amounts are always preferred,

even though projects with better return rates exist. This is why the Internal Rate of Return (and,

more importantly, the Modified IRR) approach is often used.

A capital budgeting constraint exists. The administration is faced with the "knapsack" dilemma.

They must select the set of projects that will yield the highest net present value (NPV) provided

the budget constraints.

3. Why does the payback period bias the process of asset selection toward short0lived

assets?

The ratio Fixed Costs to Contribution Margin per Unit yields the payback period in years. The

result with the least number of years is the "right" one to pick. To put it another way, the faster

you reclaim your money back, the sooner you can spend it on something else. Longer-lasting

machinery or appliances usually costs more than short-term investments, raising Overall Fixed

Costs. Given the same set of circumstances, Short-term, low-cost investments have a shorter

payback time than higher-cost assets.

4. Incremental cash flows

Fixed Asset Investment $500,000

Year 1 Depreciation -166,650.00 loss on sale of investment ($24,075.00)
Year 2 Depreciation -222,250.00
year 3 depreciation -37,025.00
Less: Accumulated Depreciation -425,925.00
Basis value $74,075.00
Disallowable tax -9,630.00
cash flow from sale of equipment ($14,445.00)
Year 0 Year 1 year 2 year 3
Fixed Asset Investment ($500,000)

Revenue
Operating expenses -6,000.00 -6,000.00 -6,000.00
Depreciation -166,650.00 ($222,250.00) ($37,025.00)
Reduction in labour cost 150,000.00 150,000.00 150,000.00
EBIT -22,650.00 -78,250.00 106,975.00
Tax 9,060.00 31,300.00 -42,790.00
Add: Depreciation 166,650.00 222,250.00 37,025.00
Operating cashflow 153,060.00 175,300.00 101,210.00

cash from sale of equipment ($14,445.00)

INCREMENTAL CASH FLOW FROM THE PROJECT ($500,000) 153,060.00 175,300.00 86,765.00

(MACRS Depreciation %) 33.33% 44.45% 14.81% 0.07%

Sarwary, Z. (2019). Capital budgeting techniques in SMEs: A literature review. Journal of Accounting and

Finance, 19(3), 97-114.

Siziba, S., & Hall, J. H. (2019). The evolution of the application of capital budgeting techniques in

enterprises. Global Finance Journal, 100504.