The Capital Assets Price Model (CAPM)‚ is a model for pricing an individual security or a portfolio. Its basic function is to describe the relationship between risk and expected return‚ which is often used to estimate a cost of equity (Wikipedia‚ 2009). It serves as a model for determining the discount rate which is used in calculating net present value. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. The formula is:
Premium Interest Weighted average cost of capital Net present value
Return On investment CONTENTS INTRODUCTION 6 The ROI Concept 6 Simple ROI for Cash Flow and Investment Analysis 7 Competing Investments: ROI From Cash Flow Streams 7 ROI vs. NPV‚ IRR‚ and Payback Period 10 Other ROI Metrics 11 LIST OF TABLES Table 1 6 Table 2 7 Table 3 8 Table 4 8 Table 5 8 Table 6 ………………………………....................... 9 Table 7 ………………………………...................... 10 Return on Investment: What is ROI analysis? Return on Investment (ROI) analysis
Premium Net present value Rate of return Internal rate of return
amount of risk involved helps managers decide the optimal resolution to the decision making process. In the Capital Budgeting Simulation‚ an important decision is to be made on which investment proposal should be chosen in relationship to the NPV‚ IRR‚ and PI. This following text will describe the risks associated with the decisions made and any possible mitigation techniques that may be introduced to help neutralize the risk. Silicon Arts Inc. Silicon Arts Inc. is looking to invest for future
Premium Investment Risk Decision making
Risk Analysis on Investment Decision Silicon Arts Inc. (SAI) is a four year old company that manufactures digital imaging integrated Circuits (IC’s) that are used in digital cameras‚ DVD players‚ computers‚ and medical and scientific instruments. Hal Eichner‚ SAI’s Chairman‚ has a two-point agenda for the company to increase market share and keep pace with technology. As the Financial Analyst for the company one must analyze two mutually exclusive capital investment proposals. The two options
Premium Net present value Capital budgeting Investment
Quantitative Business Methods Problem 1. A client invests $500‚000 in a bond fund project to earn 7% annually. Estimate the value of this investment after 10 years. Solution FVN = PV(1+r)N Here we have FV10= 500‚000 (1+0‚07)10 = 983 575‚68 Problem 2. For liquidity purposes a client keeps $100‚000 in a bank account. The bank quotes a stated annual interest rate of 7%. How much will your client have in this account at the end a. One year b. Two years Assuming no withdrawals (so all the
Premium Net present value Decision theory Internal rate of return
investment’s payback period‚ IRR‚ and NPV‚ assuming the firm’s WACC is 10%. b) If the firm requires a payback period of less than 5 years‚ should this project be accepted? Answer: Yes it should accept the project because the payback period for the project meets the less than five years requirement with 4.13 years. c) Based on the IRR and NPV rules‚ should this project be accepted? Be sure to justify your choice. Answer: Yes the project should be accepted based on the IRR of 13% the company
Premium Net present value
focuses on quantifying the | | | | | strategic option value of developing the new line of lite frozen pizzas. | | | | | | | | | | | | | | | | | | | | The model develops incremental cash flow estimates‚ then calculates NPV‚ IRR‚ MIRR‚ ARR‚ and | | | | | payback for the lite athletic drink project. Also‚ this model contains a graph which can be used to | | | | | plot the sensitivity diagrams. You can change the data tables‚ then use them to change the graph. |
Premium Depreciation Cash flow Operating cash flow
Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3‚000‚000. 1. What is the project’s IRR? (10 pts) Answer: Irr=iL+[(iU-iL)(npvL)]/[npvL-npvU] Irr=0.19+[(0.24-0.19)(193484.61)]/[193484.61-86216.77] Irr=0.19+[(0.05)(193484.61)]/[279701.38] Irr=0.19+9674.2305/279701.38 Irr=0.19+0.0346 Irr=0.22446 or 22.46% 2. What is the project’s NPV? (15 pts) Answer: 1‚100‚000/(1+0.15)^1=1‚100‚000/1.15=$956‚521.74 1‚450‚000/(1+0.15)^2=1‚450
Premium Net present value Investment
will increase the firm’s value‚ it requires an estimate of the cost of capital in order to calculate the payback‚ and it ignores cash flows beyond the discounted payback period. 4) Synthetic Resin IRR = 37% Epoxy Resin IRR = 43% IRR calculated using Excel Tim can convince the board that IRR measure can be misleading by explaining that it may result in multiple answers with nonconventional cash flows and it may lead to incorrect decisions in comparisons of mutually exclusive investments.
Premium Net present value
flows and the internal rate of return (IRR) over the 5 year period. We have made certain assumptions to calculate the final numbers which are outlined below. The “Appendix” contains the detailed calculations. Based on our calculations the project is economically feasible. The NPV of the project is $130‚961. A positive NPV implies that the present values of the cash outflows outweigh the present values of the cash inflows thereby adding value to the firm. The IRR of 13.8% is also higher than the estimated
Premium Net present value Cash flow