week 5 study Essay

Submitted By razer2626
Words: 410
Pages: 2

Capital Budget Recommendation
Capital investments are crucial to any companies’ success; it is a tool that allows the company to stay on top of the competition. It is important to understand that once an investment is made into a capital asset the only way to recover the cost is through the use of the asset to produce gains. Time value of money is the recognition that a dollar today will not be worth the same in the future it will be worth less. Guillermo Furniture must decide what the expected return on the investment (ROI) is needed in order to determine if the investment is wise choice. The cost of capital is also another useful tool that represents the minimum rate of return that a company expects to receive on an investment (Edmonds, Edmonds, & Olds, Chapter 24, 2007).
Future Cash Inflows Understanding what the future cash flows produced from an investment is an important aspect of the decision making-process. However, the future cash flows must be calculated to the present value to have a good understanding of the cash inflow. This could be completed through an excel worksheet using the net value NV function (rate,nper,pmt) or by using a table to calculate the present value of the investment. Once the present value of future cash inflows is established the cost of the investment may be subtracted. This will determine the net present value and if it is positive it will demonstrate that the return will yield the desired return. On the other hand if it is negative it will return less than the desired result. The Net Present Value (NPV) will give