Under what circumstances will the IRR and NPV rules lead to the same accept-reject decisions? When might they conflict? Using the IRR and NPV rules will always yield the same decision as long as two conditions are met: the project or investment’s cash flows are conventional and the project or investment is independent. If the initial cash flow is negative and all the subsequent cash flows are positive‚ the cash flows are said to be conventional. If at any point any of the 2nd or later cash flows
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new factory. 2. Sales of $3 million a year that will result in an increase of $150‚000 in gross margin giving the company a 5% gross margin. 3. Value of salvage at the end of the life of the project of $14 million. NPV Computation The following table displays the NPV computation with a 10% weighted average cost of capital for this project. Year | Cash Flow | PV Factor | Present Value | 0 | (10‚000‚000) | 1.0000 | (10‚000‚000) | 1 | 150‚000 | 0.9091 | 136
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cost of a project is $100‚000. Sales are for five years‚ starting next year. The company earns $0.50 per sale‚ and expects to sell 60‚000 units per year. If the interest rate is 5%‚ the NPV is -100‚000 +129‚884 = 29‚884. At what level of sales does the project break even in terms of NPV? Set PV = -100‚000 (so that NPV = 0) and find the amount of sales per year. The answer is sales in dollars = 23‚097 so that sales in units = 46‚194. Break-even analysis is a good starting point‚ but it ignores some
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Please see Exhibits below for a snapshot of the capital budget and NPV values. This information seemed to be very promising for the project in general. However‚ our continued analysis showed the project to be very sensitive to the sales price per unit of the refrigerator. We used the average demand scenario to produce a sensitivity analysis and found that with just a 5% decrease in the sales price of the refrigerator the NPV quickly dipped into a negative value thus showing the project to be
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Sensitivity analysis is a technique that indicates exactly how much a project’s profitability (NPV or IRR) will change in response to a given change in a single input variable‚ other things held constant. Sensitivity analysis begins with a base case developed using expected values (in the statistical sense) for all uncertain variables. Then‚ each uncertain variable is usually changed by a fixed percentage amount above and below its expected value‚ holding all other variables constant at their expected
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assumptions are incorrect and as consultants‚ we will provide him with correct analysis. Analysis To decide if Mr. Sanberg should choose to go forth with the Super Project‚ the NPV of the project and subsequently‚ the internal rate of return have to be determined. To begin the NPV analysis‚ the relevant and irrelevant costs are as follows: the test market and erosion costs are excluded; consequently the agglomerator and overhead costs are included. Next‚ the yearly cash flows
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‚ the initial cash flow is negative‚ and all other cash flows are positive). Which of the following statements is most correct? a. b. c. d. e. All else equal‚ a project ’s IRR increases as the cost of capital declines. All else equal‚ a project ’s NPV increases as the cost of capital declines. All else equal‚ a project ’s MIRR is unaffected by changes in the cost of capital. Answers a
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A brief evaluation of Hanson Private Label (HPL) will reveal signs of an excellent‚ growing‚ and well run company. There are no danger signs within the financials of HPL. The following have seen growth with every passing year: revenue‚ current assets‚ owner’s equity‚ net working capital‚ and sales (even groceries). The following categories have grown every year with the exception of 2005‚ where a higher than usual COGS caused a dip in gross margin – 15% versus a historically high teen’s percentage:
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Business Finance Q: Please compare the advantages and disadvantages of the following investment rules: Net Present Value (NPV)‚ Payback Period‚ Discounted Payback Period‚ Internal Rate of Return (IRR) and Profitability Index (PI). (You can start by considering the following questions for each investment rule: Does it use cash flows or accounting earnings? Does it consider all cash flows or not? Does it apply a proper discount rate? Whether the acceptance criteria are clear and reasonable? In what
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Investment Analysis and Lockheed Tri Star Problem Sets February 25‚ 2013 1a. The results of NPV‚ payback and IRR calculations are the following. For payback method‚ Rainbow Product will pay back the original investment costs after 7 years. Net Present Value is -$946 and IRR is 11.49%. Rainbow Products should not purchase the machine according to the results of NPV and IRR calculation. The net present value of purchasing this new equipment is negative‚ and the internal rate of return is less than
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