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Essay / Research Paper Abstract
This 10 page paper considers a case provided by the student. A project has been proposed and the paper shows the student how to calculate the average accounting rate of return and examines the problem with using this assessment tool. The use of net present value, NPV, is then discussed and a calculation is performed to show the student how to calculate NPV. The case then considers the best source of capital and looks at the impact of borrowing capital from a lender where there are lower interest rates, and assesses the potential impacts on the weighted average cost of capital, WACC. The final part of the paper considers the advantage and disadvantages of decisions regarding projects been made at local or had office level. The bibliography cites 5 sources.
Page Count:
10 pages (~225 words per page)
File: TS14_TEARRNPV.rtf
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Unformatted sample text from the term paper:
dividing it by the initial investment. To calculate this we first need the net cash flows, and then we need to calculate the depreciation before we can put these together.
In the case supplied by the student the first requirement is to calculate the net cash flow for each year. Here we can
look at both the income where there is a decreasing price each year by .75 and the costs, which include the variable costs, which are projected at increasing each
year by 5%, and the fixed or overhead costs that are projected at remaining the same. The income is as follows, Income per unit (a) No
of Units (b) Total income (a x b) Year 1 7.50 2,100,000 15,750,000 Year 2 6.75 1,900,000 12,825,000 Year 3 6.00 1,600,000 9,600,000 Year 4 5.25 1,600,000 8,400,000 This
gives us the total income, however we also need to look at the costs. No of Units Variable costs per unit Total variable costs Overhead costs per unit
Total overhead costs Total costs Year 1 2,100,000 1.50 3,150,000 1.10 2310000 5,460,000 Year 2 1,900,000 1.58 2,992,500 1.10 2090000 5,082,500 Year 3 1,600,000 1.65 2,646,000 1.10 1760000 4,406,000
Year 4 1,600,000 1.74 2,778,300 1.10 1760000 4,538,300 With this information we can now calculate the net income for the project by deducting the costs from the income, which will
give us the following. Total income Total costs Net profit Year 1 15,750,000 5,460,000 10,290,000 Year 2 12,825,000 5,082,500 7,742,500 Year 3 9,600,000 4,406,000 5,194,000 Year 4 8,400,000
4,538,300 3,861,700 How we have the net cash flow we need to look at the deprecation we take the initial capital value, take away any residual value for sale at
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