550 What is the IRR of remodeling your hotel? NPV= −300‚000 + = 105‚570 66‚000 66‚000 66‚000 66‚000 + + + ...+ 1.10 1.10 2 1.103 1.1010 What is the IRR of rebuilding your hotel? 100‚000 = 50‚000 50‚000 50‚000 50‚000 50‚000 + + + + (1+ IRR) (1+ IRR) 2 (1+ IRR) 3 (1+ IRR) 4 (1+ IRR) 5 IRR = 40% 300‚000 = 66‚000 66‚000 66‚000 66‚000 + + + ...+ (1+ IRR) (1+ IRR) 2 (1+ IRR) 3 (1+ IRR)10 IRR = 17% Note: you could use Excel or a financial calculator to find IRR but I will not ask
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NPV‚ and IRR evaluation techniques. It illustrates the time disparity‚ size disparity‚ and life disparity problems and the appropriate approaches to the resolution of these problems. This case works well either as a homework problem coinciding with the introduction of project ranking and capital-rationing material or as an in-class problem lecture. DEGREE OF DIFFICULTY: Moderately Difficult Question Answers Although all methods might grant projects acceptable ratings‚ NPV‚ PI‚ and IRR will not
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Mini Case Chapter 11 a. What is capital budgeting? Capital budgeting is the decision process that managers use to identify those projects that add value to the firm’s value‚ and as such it is perhaps the most important task faced by financial managers and their staff. The process of evaluating projects is critical for a firm’s success. Capital budgeting is • Analysis of potential additions to fixed assets • Long term decisions; involving large expenditures • Very
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Capital Budgeting Rules: NPV‚ IRR‚ Payback‚ Discounted Payback‚ AAR Categories of Plans 1. Replacement Projects: decisions to replace old equipment – those are among the easier of capital budgeting techniques. It is important to decide whether to replace the equipment when it wears out or to invest in repairing the machine. 2. Expansion Projects: These are decisions whether to increase the size of business or not – they are more uncertain than replacement projects. 3. New products and services: These
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Introduction to IRR vs. NPV ♦ Incremental cash flow principle for evaluation of replacement decisions ♦ Numerical exercises on incremental cash flows‚ NPV‚ IRR‚ Discounted payback period and Profitability Index At the end of the chapter the student will be able to: ♦ Apply incremental cash flow principle to a replacement decision ♦ Apply conventional as well as DCF techniques to capital investment decisions ♦ Determine NPV for a given project and fix the range of rates between which IRR for a given
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C0‚ C1‚ . . . ‚ CT‚ IRR is defined by: It is calculated by trial and error‚ by financial calculators‚ or by spreadsheet programs. 3. a. $15‚750; $4‚250; $0 b. 100%. 4. No (you are effectively “borrowing” at a rate of interest higher than the opportunity cost of capital). 5. a. Two b. -50% and +50% c. Yes‚ NPV = +14.6. 6. The incremental flows from investing in Alpha rather than Beta are -200‚000; +110‚000; and 121‚000. The IRR on the incremental cash
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Explain the theoretical rationale for the NPV approach to investment appraisal and compare the strengths and weaknesses of the NPV approach to two other commonly used approaches. One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land‚ buildings‚ machinery‚ etc.‚ in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions‚ firms have to make an assessment
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第一份答案: (A) The payback is 35‚000/5‚000= 7 years Computation of the NPV : NPV= -35‚000 + Σ 5‚000 / ( 1 + 12%)^ 15 i=1 NPV = $- 945. 67 Computation of the IRR : 0= -35‚000 + Σ 5‚000 / ( 1 + IRR)^ 15 i=12 IRR= 11.49% The NPV of this project is negative and the IRR is lower then the Cost of Capital (12%) Rainbow products shouldn’t go for it. (B) Based on the perpetuity formula we can compute the PV in this case : Computation of the PV : PV= Cash flow per year/ cost of capital) =4‚500 /
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provide a brief explanation on theoretical rationale for the net present value (NPV) method of investment appraisal and then compare its strengths and weaknesses to two alternative methods of investment appraisal‚ those of internal rate of return (IRR) and pay-back. Theoretical rationale for the NPV approach The net present value rule or NPV devised by Hirshleifer (1958)‚ is the fundamental model of how firms decide whether to invest in a project‚ commonly known as the ‘investment decision’
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analyzing the numbers and the market and property factors involved with Shady Trail‚ it is my opinion that this property is a reasonable one to invest in. It meets the criteria we had previously set forth in choosing an investment property as both the IRR and the current cash flows are in excess of the minimum we mandated. These numbers require that the assumptions we use in market rent‚ cap rate in 2003‚ vacancy rate‚ and our plans to sell the investment after 5 years all hold. If one of these assumptions
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