Capital budgeting provides financial decision makers with important perspectives

Question

Capital budgeting provides financial decision makers with important perspectives and information. With tools such as present and future values, perpetuities and annuities, and cash flows, capital budgeting can craft a detailed picture of whether an investment will be worth the cost and effort. For this week’s Assignment, you evaluate the following capital budgeting decision scenario. Pizza Planet Co. Pizza Planet Co. paid a consultant to study the desirability of installing some new equipment. The consultant submitted the following analysis: Cost of new equipment $50,000 Present value of after-tax revenues from operation $45,000 Present value of after-tax operating expenses $10,000 Present value of depreciation expenses $43,750 Consulting fees and expenses $375 The corporate tax rate is 40%. In a 1- to 2-page paper, explain whether Pizza Planet Co. should install the new equipment. Justify your response with supportive examples and references.

Explanation / Answer

Given:

To calculate the net present value of the current operations let uslook at the given,

NPV= Profits- expenses -depreciation

profits before taxes are 45000+40% of 45000= $63,000

NPV= 63000-10000=53000-43,750=$9250

The consultation fees has to be deducted and so NPV= $8875

Thecost of installing a new equipment is $50,000, but the company is not making any profits and nor is it having a NPV above the expense it wants to incurr, therefore the decision of the owner should be not to install the new equipment.

Please outline this data in the format that you require for submission.Hope this helps.

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