ACCT505 Part B Capital Budgeting problem Clark Paints‚ Inc. Data: Cost of new equipment $200‚000 Expected life of equipment in years 5 Disposal value in 5 years $40‚000 Life production - number of cans 5‚500‚000 Annual production or purchase needs 1‚100‚000 Initial training costs 0 Number of workers needed 3 Annual hours to be worked per employee 2‚000 Earnings per hour for employees
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In a 2001 Graham and Harvey survey of 392 chief financial officers (CFOs) asked “how frequently they used different capital budgeting methods?” Approximately 75% of the CFOs replied that they use net present value (NPV) or Internal Rate of Return (IRR) always or almost always (Smart‚ Megginson & Gitman‚ 2004‚ pg. 251). Projects are viewed as capital investments in the corporate world‚ and as such‚ are evaluated closely for their possible financial impacts on the “bottom line” due to their higher
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Assignment 11: Managerial Economics (MBAZ505) The main purpose of investment is to maximize shareholders’ wealth by improving the value of the firm. Firms invest to replace existing equipment‚ for expansion‚ and for compliance with government regulations. There are three categories of investment decisions: acceptance or rejection‚ ranking of projects‚ and choosing between projects. To assess whether it is viable to invest or not the NPV technique can be used to compare the present value of returns
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provide a basis for comparing several different projects. However‚ using this method would lead to a wrong decision because the ARR method uses income data rather than cash flow and it completely ignores the time value of money. 4.) Synthetic Resin IRR=350‚0001.3663+400‚000(1.3663)2+500‚000(1.3663)3+650‚000(1.3663)4+700‚000(1.3663)5-1‚000‚000= 36.63% Epoxy Resin
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markets‚ three projects are about efficiency improvements‚ and one project is about safety or environmental. The company has a minimum acceptable IRR and maximum acceptable payback years in each category. You can find the information on Exhibit 1. Ranking all these projects was the first thing need to be done. Based on the NPV at Corp.WACC(10.6%) and IRR gave the best understandable answer to the company’s board of directors. You can find this ranking of criteria on Exhibit 2. The first one in
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Capital Budgeting Techniques | | GLOSSARY Capital Budget: (1) The amount of money set aside for the purchase of fixed assets (e.g.‚ equipment‚ buildings‚ etc.). Also‚ (2) a request for authorization to purchase new fixed assets. Mutually Exclusive Proposals: Consideration of two or more assets that perform the same function. If one is chosen for purchase‚ the others are automatically rejected. Profitability Index: A ratio of the present value of the benefits (PVB) to the present value of the
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FIN204 Investment Analysis & Decision Making Assignment 02 Tran Van Trung Hieu Batch 09 E1000125 Grade (Office Use Only) ASSIGNMENT FOLDER SUBJECT CODE: FIN204 STUDENT NO: E1000125 Date received (Office Use Only) STUDENT NAME: TRAN VAN TRUNG HIEU PROGRAMME: Year 2‚ term 2 INTAKE: Subject Name:
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Budgeting QRB/501 July 25‚ 2013 On this paper the reader will be able to find the rationale in the analysis of a specific capital budgeting case study. Definitions along with explanations related to capital budgeting such as Internal Rate of Return (IRR) and Net Present Value (NPV) will be provided and debriefed. It is extremely relevant to mention that capital budgeting allows the companies to analyze one or more projects to decide eventually which project or piece of equipment would be most profitable
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best that the company should accept. The case is broken down into three separate steps including the given information about estimated cash flows (inflows & outflows)‚ determining the appropriate discount rate‚ and evaluating the cash flows using the IRR (Internal Rate of Return)‚ MIRR (Modified Internal Rate of Return)‚ NPV (Net Present Value)‚ and other metrics. Each project is chosen solely on the basis of the quantitative analysis. Here are some factors to consider for this case: Each project has
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refer to the project’s NPV and IRR. NPV indicates the possible profit (net cash flow) which the project will yield in future‚ a positive NPV suggests that company can earn profit from the investment and vice versa. IRR is the discounted rate which makes the NPV of all cash flows equal to zero‚ the greater the amount it exceeds the cost of capital (required rate of return)‚ the higher the net cash flow to the investor‚ our company should go ahead with the project if its’ IRR is higher than the required
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