Nico Andre M.

Sevillena BSBA MA 4-2 CS13- Information Management and Control

Case:
CS 13, a computer-based operation company continues to grow and develop as it uses modern
technology in their operation. Due to the growing demand, the company must develop also their
operations. After studying the situation, the manager of CS 13, Grace Bulawit-MCIT, comes up
with two projects to increase the efficiency of their op eration. First is the Repair and
Maintenance of its computers (Project A) and the other one is disposing/selling the present
computers and buy new sets of computers (Project B). She had to choose only one Project
because the company doesnt have enough fund. The manager has assembled the following
information:

Project A-Repairs and
Maintenance

Project B-Buying
new set of
computers
Purchase Cost- 50 computers 800,000

1,000,000
Annual Cash Inflow 1000000

750,000
Annual Cash Outflow 625,000

375,000
Repairs needed now 400,000

-
Salvage Value now 200,000

-
Salvage Value-Eight years from
now 150,000

300,000

If the company keeps and repairs its present computers, then it will be usable for eight more
years. If new computers are purchased, it will be used for eight years, after which it will be
replaced. The new computers would consume less electricity, resulting in a substantial reduction
in annual operating costs as shown above. The company uses a 16% discount rate.
Now, the manager has a problem in making a decision in choosing what Project is to be pursued
because they provide the same Annual Net Cash Inflow which is amounting to Php 375, 000. She
asked for assistance and hired you as a financial consultant to help her in making a decision. The
manager asked you what to choose between the two projects. Give some evidence that will prove
what project must be pursued using the information presented above.

Nico Andre M. Sevillena BSBA MA 4-2 CS13- Information Management and Control
Answer:
Capital Budgeting is used to describe how managers plan significant investments in
projects that have long-term implications such as the purchase of new equipment or the
introduction of new products. Most companies have many more potential projects that can
actually be funded. Hence, managers must carefully select those projects that promise the
greatest future return. How well managers make these capital budgeting decisions is a critical
factor in the long-run financial health of the organization.
In the problem, the manager must choose the most profitable one among two alternatives in the
future. As a Financial Consultant, we will use the Net Present Value Method in computing the
present value of cash inflows and outflows because it considers the TIME VALUE OF MONEY.
The importance of considering the time value of money is that, A peso or dollar today is worth
more than a peso or dollar in the future.
Based on the computation using the MS Excel, I will advise the manager to keep the Old
computers and have it repaired. Although they are equal in terms of Annual net cash inflow, we
should also consider the time value of money. Since the rule when using the Net Present Value
Method is The higher the Net present value of the project, the more it is acceptable and promise
greater return, we need to pursue Project A instead of Project B. The net present value of the
Project A (Old computers) is Php 1, 274, 600.40 compared to the net present value of Project A
(when we buy new computers) that is only Php 920,354.22.
The Php 354, 246.18 difference from the Net present value of the two project is a big deal
especially when there is scarcity of funds. We need to manage our funds well and see to it that
we invest it in the right place and time which promise the greatest future return to prevent future
losses or useless investments that will lead to the bankruptcy of the company.