Capital Budgeting the Initial Investment Research Proposal

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9688%. Therefore the NPV is going to be as follows:

Post Tax

Depreciation

Net Flow

PV

WACC

NPV

3) to: Management

Re: New Project

The net present value of the project is $6,954.47. Therefore, we should accept the project. The cash flows are discounted by our weighted-average cost of capital. This rate is used as the discount rate because it represents what new money costs JNJ. New capital must come either as debt or as equity. We calculated the cost of equity and the cost of debt. Then, we weighed these figures against our current capital structure in order to determine the weighted average cost of capital. If a project only returned what it costs the company to acquire the capital in the first place, the net present value would be zero. Therefore, if the project has a positive NPV, this means that the project returns to JNJ more than what it will cost us to acquire the capital to undertake the project in the first place.

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Since the NPV is $6,954.47, we should undertake the project.

4) the above calculation is based on real terms cash flow. This is based on the assumption that it is reasonable to project today's conditions into the future. if, however, our economists assume that inflation is going to increase in the coming years, we should make adjustments to our calculations to account for this. An increase in inflation will reduce the value of future cash flows. The negative affect of time on the value of future cash flows is already reflected in the discount rate.….....

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