present value and internal rate of return and profitability index. Recent studies highlight that financial managers worldwide favor methods such as the internal rate of return (IRR) or non-discounted payback period (PP) models over the net present value (NPV)‚ which is the model academics consider superior. The term capital budgeting refers to long term planning for proposal capital outlay and their financing. It includes rising long-term funds and their utilization. It may be defined as firms
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over it ’s 6 year economic life. The new truck has a 5-year MACRS life and an estimated salvage value at the end of 6 years of $2‚000. If Maplewood has a 40 percent marginal tax rate and a cost of capital of 12 percent‚ what is the NPV of the new truck? Use the Depreciation schedule listed below: (5-Year depreciation Schedule: 20%‚ 32%‚ 19%‚ 12%‚ 12%‚ 5%) Answer: Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
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Hospital is considering an expansion project that would utilize land previously purchased. By expanding into ambulatory surgical services‚ the hospital has the opportunity to increase revenues and capture market share in this area. Investigation in the NPV of the project and a scenario analysis reveal that the project would be profitable. Debt Financing This project will most likely involve debt financing. This means that interest expense would occur and should be taken into account in the analysis
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-100 +50 +50 +50 +50 +50 -300 +66 +66 +66 +66 +66 +66 +66 +66 +66 +66 Equivalent Annual Annuities (cont.) What is the NPV of remodeling your hotel? Equivalent Annual Annuities (cont.) What is the NPV of rebuilding your hotel? 50‚000 50‚000 50‚000 50‚000 50‚000 NPV= −100‚000 + + + + + 1.10 1.102 1.103 1.10 4 1.105 = 89‚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
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factors must be considered before accepting any project If the project is Technically Feasible‚ Commercially Viable‚ Financially viable. For evaluation of Financial Viability‚ we need to employ any of the following methods: 1. Net Present Value (NPV) 2. Internal Rate of Return (IRR) 3. Profitability Index (PI) Investment decisions are generally called capital budgeting decisions. One of the main important concepts in analyzing investment is the concept of time value of. The value of a present
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run the project or not. Six issues will be discussed as follows 1) importance of energy cost; 2) project’s cash flows; 3) cost of capital; 4) choose an engine 5) evaluation 6) accept or reject. We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes. Issues Importance of Energy Cost Road King Trucks
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is the NPV of the plant to manufacture? B. What is the NPV of the project at 10% higher than forecast‚ and what if the NPV was 10% lower? C. What is the NPV with all of the above‚ and how does the NPV change if the cost grows by 5% rather than 2%? The Bauer industries’‚ NPV from research was found to be 57.271771 for revenues and expenses. At 10% higher the companies NPV for revenue and expenses would be 93.99816. At 10% lower the NPV would be 20.54526. With the growth at 2% the NPV would
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Hertz should be willing to pay for the fleet of cars with all-equity funding is the price that makes the NPV of the transaction equal to zero. NPV = -Purchase Price + PV[(1- TC )(Earnings Before Taxes and Depreciation)] + PV(Depreciation Tax Shield) Let P equal the purchase price of the fleet. NPV = -P + (1-0.34)($100‚000)A50.10 + (0.34)(P/5)A50.10 Set the NPV equal to zero. 0 = -P + (1-0.34)($100‚000)A50.10 + (0.34)(P/5)A50.10 P = $250‚191.93 + (P)(0.34/5)A50
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flow -1‚500‚000 540‚000 Table 2 NPV= -$1‚500‚000+ $540‚000*[(1-1.13^-5)/0.13] = $399‚304.88 1. For optimistic sensitivity analysis Based on the information given as the table 1‚ we can see clearly that there are five variables in the analysis‚ in terms of market size‚ market share‚ price‚ variable costs‚ and fixed costs. For each variable changing‚ we can get different cash flows‚ which will result in the movement of NPV even making the negative NPV. The consequences of the altering are
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A Comparison of Capital Budgeting Techniques Capital budgeting deals with setting the criteria and prescribing the process required for making capital investment choices. Choosing an investment project‚ that is‚ making a capital investment choice is ultimately a cost/benefit analysis. It requires valuing the project by comparing the payoff to its costs. Problem Value‚ rank and select investment projects Example 1. Project A Required rate year 1: year 2 year 3 year 4 year 5 Initial
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