StudyThere are at least six capital budgeting tools a firm can use in analyzing a capital expenditure. They are: net present value (NPV)‚ internal rate of return (IRR)‚ profitability index (PI)‚ payback period (PB)‚ discounted payback period (DRP)‚ and modified internal rate of return (MIRR). This case study will focus mainly on NPV and IRR‚ in addition to the remaining four capital budgeting tools. Net Present Value (NPV) The NPV of an investment proposal for a project is the same as the” present
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the strengths and weaknesses of the Cash Payback Period‚ Discounted Cash Payback Period‚ NPV‚ IRR and MIRR capital expenditure budgeting methods. Prepare a recommendation for Stewart regarding the capital budgeting method or methods to use in evaluating the expansion alternatives. Support your answer. Capital budgeting techniques such as payback period‚ net present value (NPV)‚ internal rate of return (IRR) and modified internal rate of return (MIRR) all offer particular strengths and weaknesses. The
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( Answers to Mini-Case Questions BioCom Inc. This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period‚ discounted payback period‚ NPV‚ IRR‚ MIRR‚ and PI. 1. Compute the payback period for each project. |Time of Cash Flow |Nano Test Tubes |Microsurgery Kit | |Investment |−$11‚000.00 |−$11‚000.00
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cash flows to be consistent with the year. 7. Given the shortcomings of the IRR methodology‚ it still proves to be an accurate method to use in evaluating the project alternatives facing IEI. It measures the benefits or returns relative to the amount invested and does not give a fixed dollar amount of return‚ unlike NPV which is prone to error. IRR also discounts the cash flows unlike the undiscounted payback period. IRR also proves to be accurate because accdg. To this method‚ among the investment
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to the IRR rule you would pick project S and according to the NVP rule it is telling us to pick Project L. f. 1. What is the underlying cause of ranking conflicts between NVP and IRR? There are conflicts when it comes to NVP and IRR because of the size of a project and the size and timing pattern of cash flows. It would not show accurate information when comparing the larger projects to smaller ones. 2. What is the reinvestment rate assumption‚ and how does it affect the NVP versus IRR conflict
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internal rate of return (IRR) are two very practical discounted cash flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments‚ the NPV method is easier to use and more reliable. Introduction To this point neither of the two discounted cash flow procedures for evaluating an investment is obviously incorrect. In many situations‚ the internal rate of return (IRR) procedure will lead
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expected return and risk of failure in the project‚ the IRR can generate two different values for the same project when future cash flows switch from negative to positive (or positive to negative). In addition‚ since the IRR is expressed as a percentage‚ and This can make small projects appear more attractive than large ‚ although large projects with lower IRR may be more attractive as NPV of smaller projects with IRR . The management of the IRR must be just when the project generates no interim cash
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Bullock Gold Mining The payback period for Bullock Gold Mining in the book does not have a required time period. Usually‚ a company has a pre-specified length of time as a benchmark. The decision rule is to invest in projects that pay sooner or have a shorter payback period. We calculated the payback period to be 3.96 years which is less than half of the expected duration of the project. To determine 3.96 we added the Present Value of the Cash Flows until we matched the initial investment
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maximum expected payback period 4.04years > 4years Lathe B project is accepted because it payback period is less than the 4 year maximum payback period 3.65years < 4 years ---------------------------------------- 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
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DCF4 = 950000/(1+0.15)^4 = 950000/1.74901 = 543165.58 NPV Calculation NPV = 956521.74 + 1096408.32 + 854771.1 + 543165.58 -3000000 NPV = 3450866.74 -3000000 NPV = $450‚866.74 Using this online IRR Calculation Tool http://finance.thinkanddone.com/online-i… we get the following IRR Discounted Net Cash Flows at 19% DCF1 = 1100000/(1+19%)^1 = 1100000/1.19 = 924369.75 DCF2 = 1450000/(1+19%)^2 = 1450000/1.4161 = 1023938.99 DCF3 = 1300000/(1+19%)^3 = 1300000/1.68516 = 771440.56
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