II. Alternative Decision Criteria Payback Period‚ IRR‚ Profitability Index NBA6060‚ Spring 2014 Hyunseob Kim 1 Which investment decision criteria to use? NBA6060‚ Spring 2014 Hyunseob Kim 2 1 Potential interview question: “What’s the difference between IRR and NPV?” NBA6060‚ Spring 2014 Hyunseob Kim 3 Alternatives to NPV rule • The NPV rule leads to investment decisions in the shareholder’s best interest. • But‚ alternative investment rules have been
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Investment decisions are essential for a business as they define the future survival‚ and growth of the organisation. The main objective of a business being the maximisation of shareholders’ wealth. Therefore a firm needs to invest in every project that is worth more than the costs. The Net Present value is the difference between the project’s value and its costs. Thus to make shareholders happy‚ a firm must invest in projects with positive NPVs. We shall start this essay with an explanation of the
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The cost of capital increased? (2) The cost of capital decreased? (G) Determine the IRR for each project. Should they be accepted? (H) How does a change in the cost of capital affect the project’s IRR? (I) Why is the NPV method often regarded to be superior to the IRR method? [A] Why is the investment appraisal process so important? Ans. Finance is the life blood of business. Business
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change if the WACC change; if the WACC increases the NPV will decrease on the other hand if the WACC decreases the NPV will increase. D – 1 Internal rate of return (IRR) is the discount rate that forces PV inflows equal to cost‚ and the NPV = 0. IRR using excel for project L: IRR 18.13% For project S: IRR 23.6% D – 2 A project IRR is the same as a bond’s YTM. The YTM on the bond would
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profitable. This report is able to present the weakness and strength of the techniques according to the wind turbine system project of McCain Foods Company. Payback Period‚ Average Rate of Return (ARR)‚ Net Present Value (NPV) and Internal Rare of Return (IRR) are used to figure out positive or negative about this project. The McCain Foods decides to invest to wind turbine system through using these investment appraisal techniques. Consequently‚ the recommendations we proposed in the last part of report
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Calculating Returns Suppose a stock had an initial price of $92 per share‚ paid a dividend of $1.45 per share during the year‚ and had an ending share price of $104. Compute the percentage total return. The return of any asset is the increase in price‚ plus any dividends or cash flows‚ all divided by the initial price. The return of this stock is: R = [($104 – 92) + 1.45] / $92 R = 0.1462 or 14.62% Calculating Returns Rework the problem above‚ but this time assuming the ending
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managers must be particularly aware of the timing of cash flows (the time value of money ’) and associated risks. This financial decision-maker will use projected cash flows to determine whether acquiring Corporation A or Corporation B (i.e. NPV and IRR) is the best choice. If acquisition does not generate positive cash flow‚ the company is effectively providing finance for the acquired corporation. Capital Budgeting Decisions Many business opportunities involve sacrificing current earnings for
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Project appraisal techniques are used to evaluate possible investment opportunities and to determine which of these opportunities will generate the best return to the firm’s shareholders. Therefore‚ it is vital for the firm if they wish to continue receiving funds from shareholders to employ the best techniques available when analysing which investment opportunities will give the best return. There are two types of project appraisal techniques: non-discounted cash flows and discounted cash flows
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Results In the two capital budgeting cases corporations (A and B) have different revenues values and expenses as well as variable depreciation expenses‚ tax rates and discount rates. The members of our team had to compute both corporate cases NVP‚ IRR‚ PI‚ Payback Period‚ DPP‚ and project a 5-year income statement and cash flow in a Microsoft Excel spreadsheet. The future cash flows of the project and discounts them into present value amounts using a discount rate that represents the project’s cost
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commonly known as the internal-rate-of-return (IRR) method). It is clear that the authors have some reservations with this method part of their journal article is dedicated in proving that IRR has severe flaws and at times will not result in maximizing the net worth of a company from IRR based investment decisions. (Lorie & Savage‚ 1955‚ p. 239) 1.1 Thesis Statement The research below will demonstrate that the Lorie-Savage problem shows that the IRR method has severe flaws and therefore investment
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