M7A1 Essay Example | Topics and Well Written Essays - 500 words

M7A1 - Essay ExampleUnderlying concept of initial investment includes cash outlay, working capital, salvage value and tax implications. The factors that are entangled with the initial investment are purchase price, cash from the sales of old equipment, marginal income tax, increase in working capital, cost of shipping and installation of bleak equipment. The factors that are confused with the operating cash flows are sales revenue, cost of production, income before taxes, marginal tax rate, depreciation, increase in working capital. The factors that are involved in terminal cash flow are decrease in working capital, salvage value, marginal income tax rate.The criteria capital budgeting includes (1) cost of capital, (2) opportunity cost, and break-even point. address of capital determines the cost of borrowing to pay for the project. This value set the benchmark for the lowest possible return. This benchmark shows if the investment is worth with compare to other investments. luck cost determines the cost for taking advantage of one option over another. Break-even point determines if the project would contribute to the growth of the company. Break even is the point at which sales equals cost. Break-even point involves determining fixed and variable cost. Fixed costs are values that do not depend on production quantity. These costs are like, rent, salary, insurance, etc. Most of the variable costs, are associated with raw material, utility and transportation.Capital budgeting techniques are explicit formulas for analysis of financial values that determine if a company should proceed with the planned investment or not. Some of them are ( Investment decision Capital Budgeting ) Net Present Value (NPV), Internal roll of Return (IRR), and Payback methods. All three methods use Operating Cash Flow (OCF) values. The OCF evaluates net cash flow for each year of project operation. The