Present Value of Cash Inflows: Application in Capital Budgeting Decision Making
Overview
This coursework assignment addresses the application of present value calculations in capital budgeting decisions. The student demonstrates how to calculate the net present value of future cash inflows using the Present Value Interest Factor of an Annuity (PVIFA) formula and applies this concept to evaluate investment viability.
What this coursework covers
- Question 1: NPV calculation using PVIFA formula for a machine costing $18,000 with annual payments of $5,000 over 4 years at 5% interest rate
- Question 2: Analysis of purchasing power and comparison of present value ($17,730) against actual machine cost ($18,000)
- Question 3: Reflection on the relevance of economics and finance concepts in understanding present value
- Question 4: Application of present value concept to capital budgeting decision framework for investment acceptance or rejection
Preview
Present Value of Cash Inflows
Student’s Name
Affiliate Institution
Question 1
Cost of machine =$18,000
Annual Payment= $5,000
Period = 4 years
Interest rate= 5% p.a
NPV = A*PVIFA
= A* [(1- (1/(1 + r)n) ) / r ]
= 5,000*3.5460
= $17,730
Question 2
In the present, we do not have enough purchasing power to acquire the machine. This is because the present value of our future cash payments is equal to $17,730, which is lower than the actual current cost of the machine valued at $18,000.
Question 3
The economics and finance concepts have played a significant role in making the present value calculation simple and easy to understand. Therefore, the present value concept is interesting and enjoyable.
Question 4
The provided text is effective in explaining the application of present value in capital budgeting decisions. This is because capital budgeting involves the planning of available capital to maximize profitability in the long-term. Therefore, if the present value of the cash inflows from an investment is lower than the current cost of the investment, we can decide to reject the investment. If the cost is lower than the cash inflows from an investment, we can accept to undertake the venture.