CU Boxes, Inc. Capital Budget Recommendation on a New Boot Sole Essay

CU Boxes, Inc. Capital figure Recommendation on a New Boot Sole Machine - Essay ExampleThe chief financial officer has been tasked with offering a recommendation as to whether to stay the course with the current machine, delay the purchase, or spoil the machine. For the purposes of this budgetary review and abstract the following assumptions atomic number 18 made CU Boxes, Inc.s send packing come out shall be 10%. Lets see how the CFO tackles this request.There are two types of enthronisations. The investment decisions of any business are of two types ache terminus (where funds are usually invested for more than three years) and short term (where investments are for a year or less). (Kapil p1). In this case, the boot sole machine, where the payback is longer than a year, is a long-term investment and fits the roof budgeting criteria. The growth of any company is measured by the expect surpass multiplied by the amount of funds invested by the firm, that is, g = b x r - where g is growth of the firm b, the funds retained by the firm only for investment purpose r the essential/expected rate of return and r gt k (the cost of capital). (Kapil p1)What the Kapils model tells us is that as long as the expected rate of return is greater than the cost of capital (the discount rate at which cost of capital is calculated), there will be positive growth and that this is a good subject to have. These decisions have to fulfill the criteria of creating net positive present value for the organization. Thus an organization should grab and bandage on to every opportunity (both external and internal) that creates positive net present value (NPV) for its shareholders. (Kapil p1).Net present(a) Value (NPV) defined as the present value of an investments future net cash flows minus the sign investment. If positive, the investment should be made unless an even better investment exists, otherwise it should not, (InvestorWords.com 3257), is one method of analysis used by C FOs. Another is the Internal Rate of Return (IRR) defined as the discount rate at which the present value of the future cash flows of an investment equals the cost of the investment. When IRR is greater than the required return - called hurdle rate in capital budgeting - the investment is acceptable. (Zephyrmanagement.com/glossary). utilize NPV first, we have an immediate outlay of capital and a constant return of cash flow calculated at year-end. NPV can be give tongue to as followsNPV = (10%, CF1, CF2, CF3, CF4, CF5)+CO where CF is cash flow and CO is cash outlay.In this case, with a discount rate of 10%, the result is a positive $14,998.98 at the end of year quadruplet and a positive $14,991.91 at the end of year five. (These computations were made using an ExcelTM spreadsheet).Based on this NPV analysis the investment should be made and the CFO should make such a recommendation to his companys owners as per Kapils statement above. Using IRR to determine whether the yield rate in a similar period is larger than the discount or hurdle rate, the result at the end of four years is a yield of 8%, which puts it down the stairs the discount rate. However, if the period of calculation is five years the IRR is now 15% and well above the 10% discount rate required. So, if the CFO had only used the IRR analysis for only a period of four years his recommendation might have been to limp along with the current machine, but if he ran the calculation out to five years the recommendation would be the same as