Finance Paper

Case Study

The case

In the case study, Dave Wang and Eva Welch are going to invest in a project. They would need to spend about $1000000 on plant, equipment and supplies. In the first year of their operations, their sales will be low because of the cheaper prices they are selling their parts for. When they get a better brand loyalty and are trusted then they can raise the prices.

The second project is to sell chips to one of the already established chip makers. For this project, the investment would be around $200000. They would need high end plant and equipment which would test the wafers before they are made. After outsourcing and sale of patent the net investment for the project B will be $900,000. Eva and Dave were sure that there would be considerate profits the first year and in the future.

Eva and Dave need to decide what to do. They need to figure out among the different techniques of capital budgeting of to use. The required rate of return is 20% for both projects. Eva and Dave would like the project they choose to have a payback period of less than 3.5 years and a discounted payback period of less than 4 years.

The analysis they have carried out so far is as followed:

Metrics | Project A | Project B |

Payback period (in years) | 3.15 | 1.38 |

Discounted payback period (in years) | 3.98 | 1.79 |

Net Present Value (NPV) | $612,847.22 | $596,206.28 |

Internal Rate of Return (IRR) | 35.93% | 55.07% |

Profitability Index | 1.61 | 1.66 |

Modified Internal Rate of Return (MIRR) | 32.04% | 32.84% |

Capital budgeting

Capital Budgeting refers to the decision making process that deals with the investment in fixed assets or long term projects.

* It helps in estimation of decisions regarding the expenditure concerns.

* It helps in tackling the outflows which results in long term gains.

* It also acts as a determining agent that evaluates the adequacy of returns.

Before making a decision to analyse the investment proposal, they...