CAPITAL BUDGETING Cost of Capital Evaluating Cash Flows Payback‚ discounted payback NPV IRR‚ MIRR The Cost of Capital • Cost of Capital Components – Debt – Common Equity • WACC Should we focus on historical (embedded) costs or new (marginal) costs? The cost of capital is used primarily to make decisions which involve raising and investing new capital. So‚ we should focus on marginal costs. What types of long-term capital do organizations use? nLong-term debt nEquity Weighted
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Chapter 13 Real Options and Other Topics in Capital Budgeting Learning Objectives After reading this chapter‚ the student should be able to: Explain why conventional NPV analysis may not capture a project’s impact on the firm’s opportunities. Identify five different types of real options. Explain what an abandonment/shutdown option is‚ give an example of a project that includes this type of option‚ and explain what an option value is. Explain what a decision tree is and provide an example of
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Cross-Border Valuation Question 1 There are two ways to compute the projects NPV. The first approach is to calculate it in Mexican Pesos and then change the resulting figure into Euros at the spot rate of MXN15.99/EUR. Note that the discount rate that we have used was the yield on the long-term peso-denominated corporate bonds. Below is the screenshot showing how we have done this. Computing NPV in Mexican Pesos (resulting NPV in Euros is 138‚902) Question 2 The second approach is to transfer each
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choose our life partner prudently. When I was a little girl‚ like many other girls‚ I had dreams of marrying a prince riding a white horse on the green pasture and seek for perfect guy. After I grew up‚ I realized that it is not likely to happen. As I think of my ideal spouse‚ many traits and qualities come to my mind. Of many qualities‚ I am going to give 3 most important things that I would look for my ideal spouse. First of all‚ my spouse should be naive. Meaning of ‘naïve’ is ranging over
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.............................................................3 Analysis...............................................................................4 Myst..............................................................................4 Riven: The Sequel To Myst...........................................5 Myst 3: Exile................................................................6 Uru: Ages Beyond Myst...............................................7 Myst 4: Revelation...........................
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Dahl is the obvious choice for a movie adaptation. “Lamb to the Slaughter” will make a better and more enjoyable movie adaptation Than “The Dinner Party” by Mona Gardner‚ because “Lamb to the Slaughter” has a well developed main character‚ room for a sequel‚ and is a much longer story. “Lamb to the Slaughter” has a well-developed character that can and will be explored in a movie adaptation which is not present in the story “The Dinner Party”. The first piece of information we have about a character
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a firm’s future Should we build this plant? All rights reserved - Christopher B. Alt 2 Key Steps in Capital Budgeting Estimate CFs (inflows & outflows) Assess riskiness of CFs Determine the appropriate cost of capital Find NPV and/or IRR Accept if NPV > 0 and/or IRR > WACC All rights reserved - Christopher B. Alt 3 Independent vs. Mutually Exclusive Projects Independent projects: if the cash flows of one are unaffected by the acceptance of the other Mutually exclusive projects:
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CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS Answers to Concept Questions 1. In this context‚ an opportunity cost refers to the value of an asset or other input that will be used in a project. The relevant cost is what the asset or input is actually worth today‚ not‚ for example‚ what it cost to acquire. 2. a. Yes‚ the reduction in the sales of the company’s other products‚ referred to as erosion‚ should be treated as an incremental cash flow. These lost sales are included because
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NPVs are easy to determine using a calculator with an NPV function. NPVL = $18.78 and NPVS = $19.98. Answer 2: The rationale behind the NPV method is straightforward: if a project has NPV = $0‚ then the project generates exactly enough cash flows to recover the cost of the investment and to enable investors to earn their required rates of return (the opportunity cost of capital). If NPV = $0‚ then in a financial (but not an accounting) sense‚ the project breaks even. If the NPV is positive
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---------------------------------------- PART B: NPV &IRR LATHE A NPV & IRR LATHE B NPV & IRR years cash flow PV Factor @13% PV cash flows PV Factor @13% PV 0 (660‚000) 1 (660‚000) (360‚000) 1 (360‚000) 1 128‚000 0.885 113‚274 88‚000 0.885 77‚876 2 182‚000 0.783 142‚533 120‚000 0.783 93‚978 3 166‚000 0.693 115‚046 96‚000 0.693 66‚533 4 168‚000 0.613 103‚038 86‚000 0.613 52‚745 5 450‚000 0.543 244‚242 207‚000 0.543 112‚351 NPVA 58‚133 NPVB 43‚483 IRRA 16% IRRB 17% ACCEPTABILTY OF EACH PROJECT: Under the NPV calculations both
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