24. We can use the debt-equity ratio to calculate the weights of equity and debt. The debt of the company has a weight for long-term debt and a weight for accounts payable. We can use the weight given for accounts payable to calculate the weight of accounts payable and the weight of long-term debt. The weight of each will be: Accounts payable weight = .15/1.15 = .13 Long-term debt weight = 1/1.15 = .87 Since the accounts payable has the same cost as the overall WACC‚ we can write the equation for
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Q1: Is the NPV that is generated by the simulation macro the firm value or from the perspective of Mr. Bernard? A: The Simulation tab calculates NPV from the perspective of Mr. Bernard. If you look at the inputs at the top left of the worksheet‚ Bernard’s stake and investment are needed. These are used in the NPV formulas in rows 36 to 39. Please try to understand the formulas. While this course cannot cover coding for simulations‚ please do go through the formulas to get
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cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2‚162‚760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project‚ we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577‚069. With the NPV of $577‚069 our conclusion is to accept this project as
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When the cash flows are uniform The cost of a proposal is $ 10‚000. The cash flows are as follows: Year Cash flows 1 2500 2 2500 3 2500 4 2500 5 2500 6 2500 Calculate Pay Back Period (PBP) When the cash flows are not uniform 1. There are two Proposals. Proposal A and Proposal B. Both cost the amount of $ 60‚000. The discount rate is 10%. The cash flows before depreciation and tax are as follows: Year Proposal A Proposal B $ $ 0
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CHAPTER 18 VALUATION AND CAPITAL BUDGETING FOR THE LEVERED FIRM Answers to Concepts Review and Critical Thinking Questions 1. APV is equal to the NPV of the project (i.e. the value of the project for an unlevered firm) plus the NPV of financing side effects. 2. The WACC is based on a target debt level while the APV is based on the amount of debt. 3. FTE uses levered cash flow and other methods use unlevered cash flow. 4. The WACC method does not explicitly include the interest cash
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Technological changes In-sourcing PCBs will bear risks at the same time. First issue is that whether PCBs will be replaced by new technology and then investment in facilities can be valueless. We forecast the project needs decade to get a positive NPV but chances are that PCBs could be eliminated by industry. (2). Insufficient production capacity If PCBs technology can stand that long and Stryker Corporation’s demand of PCBs keeps increasing there are still risks that the demand exceeds the facility’s
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1 NPV—Mutually exclusive projects Hook Industries is considering the replacement of one of its old drill presses. Three alternative replacement presses are under consideration. The relevant cash flows associated with each are shown in the following table. The firm’s cost of capital is 15%. a. Calculate the net present value (NPV) of each press. b. Using NPV‚ evaluate the acceptability of each press. c. Rank the presses from best to worst using NPV. PERSONAL FINANCE PROBLEM P9–11 Long-term
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positive NPV. The overall capital available for new projects for the next year is $5 million. Which of the following statements about the capital budgeting process that Cynthia should employ is true? 1) Cynthia should rank the projects in increasing order of NPV and choose the highest ranked projects in order until the capital available is exhausted. 2) Cynthia
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to Concepts Review and Critical Thinking Questions 1. Assuming conventional cash flows‚ a payback period less than the project’s life means that the NPV is positive for a zero discount rate‚ but nothing more definitive can be said. For discount rates greater than zero‚ the payback period will still be less than the project’s life‚ but the NPV may be positive‚ zero‚ or negative‚ depending on whether the discount rate is less than‚ equal to‚ or greater than the IRR. The discounted payback includes
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business opportunities in order to decide which are worth undertaking. (Kidwell and Parrino‚ 2009) There are many techniques used in the process of capital budgeting. The most common methods are payback‚ discounted payback period‚ net present value (NPV)‚ internal rate of return (IRR)‚ accounting rate of return (ARR) and modified internal rate of return (MIRR). Payback Period The payback period is defined as the number of years that it will take a project to recover the initial investment of a
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