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Bean Counter |
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https://www.dwmbeancounter.com |
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Capital
Investment Model |
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Project Summary |
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NPV Rate |
14.00% |
15.00% |
20.00% |
14.00% |
15.00% |
20.00% |
14.00% |
15.00% |
20.00% |
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Calculations |
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NPV |
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PI |
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EAA |
IRR |
Payback |
ARR |
Depreciation |
Used for ARR Calc |
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Project 1 |
($71,051) |
($87,425) |
($162,230) |
0.93 |
0.91 |
0.84 |
(20696) |
(26080) |
(54246) |
9.99% |
3 Years |
24.50% |
$0 |
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Project 2 |
$38,622 |
$10,792 |
($113,522) |
1.04 |
1.01 |
0.89 |
13255 |
3219 |
(43852) |
15.40% |
4 Years |
39.38% |
$0 |
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Project 3 |
$28,259 |
$18,752 |
($24,691) |
1.06 |
1.04 |
0.95 |
9699 |
5594 |
(9538) |
17.07% |
3 Years |
35.00% |
$0 |
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Project 4 |
($14,437) |
($27,480) |
($85,696) |
0.97 |
0.95 |
0.83 |
(4955) |
(8198) |
(33104) |
12.94% |
4 Years |
36.88% |
$0 |
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Project 5 |
$0 |
$0 |
$0 |
0.00 |
0.00 |
0.00 |
0 |
0 |
0 |
na |
0 Years |
0.00% |
$0 |
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Periods |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
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Note:Expenses
Do Not Include
Depreciation |
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Number Of Periods |
5 |
Needed For EAA and ARR Calculation |
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Project 1 |
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Revenues |
$0 |
$400,000 |
$400,000 |
$225,000 |
$200,000 |
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$0 |
$0 |
$0 |
$0 |
$0 |
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Expenses |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Profit |
$0 |
$400,000 |
$400,000 |
$225,000 |
$200,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Capital Investment |
$1,000,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow (Annual) |
($1,000,000) |
$400,000 |
$400,000 |
$225,000 |
$200,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow
(Cumulative) |
($1,000,000) |
($600,000) |
($200,000) |
$25,000 |
$225,000 |
$225,000 |
$225,000 |
$225,000 |
$225,000 |
$225,000 |
$225,000 |
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Number Of Periods |
4 |
Needed For EAA and ARR Calculation |
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Project 2 |
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Revenues |
$0 |
$150,000 |
$100,000 |
$550,000 |
$775,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Expenses |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Profit |
$0 |
$150,000 |
$100,000 |
$550,000 |
$775,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Capital Investment |
$1,000,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow (Annual) |
($1,000,000) |
$150,000 |
$100,000 |
$550,000 |
$775,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow
(Cumulative) |
($1,000,000) |
($850,000) |
($750,000) |
($200,000) |
$575,000 |
$575,000 |
$575,000 |
$575,000 |
$575,000 |
$575,000 |
$575,000 |
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Number Of Periods |
4 |
Needed For EAA and ARR Calculation |
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Project 3 |
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Revenues |
$0 |
$200,000 |
$250,000 |
$150,000 |
$100,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Expenses |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Profit |
$0 |
$200,000 |
$250,000 |
$150,000 |
$100,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Capital Investment |
$500,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow (Annual) |
($500,000) |
$200,000 |
$250,000 |
$150,000 |
$100,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow
(Cumulative) |
($500,000) |
($300,000) |
($50,000) |
$100,000 |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
$200,000 |
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Number Of Periods |
4 |
Needed For EAA and ARR Calculation |
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Project 4 |
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Revenues |
$0 |
$75,000 |
$50,000 |
$225,000 |
$387,500 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Expenses |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Profit |
$0 |
$75,000 |
$50,000 |
$225,000 |
$387,500 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Capital Investment |
$500,000 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow (Annual) |
($500,000) |
$75,000 |
$50,000 |
$225,000 |
$387,500 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow
(Cumulative) |
($500,000) |
($425,000) |
($375,000) |
($150,000) |
$237,500 |
$237,500 |
$237,500 |
$237,500 |
$237,500 |
$237,500 |
$237,500 |
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Number Of Periods |
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Needed For EAA and ARR Calculation |
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Project 5 |
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Revenues |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Expenses |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Profit |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Capital Investment |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow (Annual) |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Cash Flow
(Cumulative) |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
$0 |
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Net Present
Value (NPV) |
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Net
Present Value (NPV) is a way to figure out if an investment will make a
profit, considering that money today is |
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worth more than money in the future. |
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It
compares the current value of expected future cash flows (like revenue or
savings) with the initial investment cost. |
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Decision
Criteria: According the NPV technique, for
accept-reject type of decision, if the |
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project
has a positive NPV, the project is acceptable. If a project(s) NPV is less
than ‘Zero’. It |
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gives
negative NPV. Hence, it must be rejected. For mutually exclusive projects
(i.e., only |
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one
project will be selected) the project with highest positive NPV should be
selected. |
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Internal
Rate Of Return (IRR) |
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This
is another important discounted cash flow technique used in capital budgeting
decisions |
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IRR can be defined as that rate which
equates the present value of cash inflows |
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with
the present value of cash outflows of an investment proposal. It is the rate
at which the |
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net
present value of the investment proposal is zero. |
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If
the internal rate of return exceeds the required rate of return, then the
project is accepted. If |
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the
project’s IRR is lower that the required rate of return, it will be rejected.
In case of |
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ranking
the proposals, the technique of IRR is significantly used. The projects with
higher |
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rate
of return will be ranked as first compared to the lowest rate of return
projects. |
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Thus, the |
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IRR acceptance rules
are: |
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Accept if r>k |
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Reject if r<k |
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May accept or reject if
r=k |
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Where;
r = internal rate of return |
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k=cost of capital |
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Payback Method |
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The payback method is a capital budgeting
technique that determines how long it takes for an investment to recoup its initial cost. |
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It's
a simple and quick way to assess the profitability of an investment by
calculating the time it takes for the cash flow |
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from
the investment to equal its original cost. |
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A shorter payback period generally
indicates a more attractive investment, as it signifies a quicker return on
investment. |
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Profitability Index
(PI) |
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The profitability index (PI) is a
financial metric that assesses the attractiveness of an investment by
comparing the present |
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value of future cash flows to the initial
investment. It essentially measures how much value is created per
dollar invested. |
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A PI greater than 1 suggests the project
is likely profitable, while a PI less than 1 indicates it might not be a good
investment. |
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Average
Rate Of Return (ARR) |
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The average rate of return (ARR) is a capital
budgeting method that calculates the average annual percentage return |
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on an investment. |
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It's a simple metric that helps businesses
assess the profitability of a project by comparing the average annual
profit |
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the initial investment. |
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Projects that exceed the target ARR are
considered acceptable, while those falling below it are typically
rejected. |
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Equivalent
Annual Annuity (EAA) |
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The
Equivalent Annual Annuity (EAA) is a method used in capital budgeting to
compare mutually exclusive projects |
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with
different lifespans by calculating the constant annual cash flow that would
be equivalent to the project's |
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overall
profitability. It effectively converts a project's total net present value
into an annual equivalent. |
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When
comparing projects, the one with the higher EAA is generally preferred. |
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