If the vendor is given extension then NPV from year 1 to 13 should be considered, however if the vendor is not given extension then NPV from year 1-10 should be considered. However at the start of the project, we have no idea whether the vendor will be given extension, we can only assign some probability to it. The probabilities are given in Table 2. You need to compute the Weighted (or Expected) NPV of both the proposals. Weighted NPV = Probability of extension * NPV for year 1 to 13+ (1 - Probability of extension) * NPV for year 1 to 10 (c) Write formula in D23 to compute weighted NPV for Proposal 1, copy the formula down to cell D29 and then across till E29. (Create formula such that you can copy down and across and get the correct result, use proper referencing) (d) Write a IF function to decide which proposal to be selected. Note: We should select proposal which has Lower NPV. Probability of Vendor given Extension 65% 70% 75% 80% 85% 90% 95% Weighted (Expected) NPV of Proposal1 1875.07 1891.41 1907.74 1924.07 1940.41 1956.74 1973.08 Table 2 Weighted (Expected) NPV of Proposal2 Which proposal to select? 1865.90 1884.64 1903.39 1922.14 1940.89 1959.63 1978.38 Probability of Vendor given Extension 65% 70% 75% 80% 85% 90% 95% Sample Answer Weighted (Expected) NPV of Proposal1 1875.07 1891.41 1907.74 1924.07 1940.41 1956.74 1973.08 Table 2 Weighted (Expected) NPV of Proposal2 Which proposal to select? 1865.90 Proposal 2 1884.64 Proposal 2 1903.39 Proposal 2 1922.14 Proposal 2 1940.89 Proposal 1 1959.63 Proposal 1 1978.38 Proposal 1
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
How do I write the formula to compute which proposal to select? The sample answer is given next to it. I need to write an “IF” statement and be able to drag that “IF” statement down to the other cells and for it to be correct.
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