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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performance measures (NPV‚ IRR‚ MIRR and Payback period) to decide whether to buy or build the technology. First of all‚ I use the given data to make the assumptions for both buy and build analysis. Next‚ I use the assumptions to calculate the after-tax cash flow. Last but not the least‚ I have the after-tax cash flow and I use excel to calculate the NPV‚ IRR‚ MIRR‚ and Payback period. From NPV perspective‚ both buying and building the technology are acceptable because these two projects NPV is positive.
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paid off in equal annual installments over the project’s 10-year life. A) Calculate APV. APV = NPV + PV of debt tax shield NPV = PV of cash flows - initial investment Initial Investment 10‚000‚000 Cash flows 1‚750‚000 Period 10 years Discounting rate 12% PV of cash flows 9‚887‚890 using the PV function NPV (112‚110) We now calculate the PV of debt tax shield Year Debt Outstanding at Start of Year Interest
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discussed: accounting rate of return (ARR)‚ payback period‚ net present value (NPV) and internal rate of return (IRR). The ARR expresses the return on an investment as an annual percentage of the cost of that investment. To decide whether to accept or reject a project‚ organisations can set a minimum ARR which needs to be exceeded by the project’s ARR. The advantages of the ARR are that it is easy to understand and calculate and therefore accepted by many people. The ARR is the only method that uses
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NUCOR CASE In this analysis we use the Net present value to consider if Nucor should invest in the new technology called: thin slab minimill. NPV is really useful in order to make this kind of decision because it uses the concept of future cash value to evaluate whether the investment is worth‚ however the NPV is sometimes difficult to calculate because it is not always easy to estimate future cash flow. Considering the assumption I made in the first part of the spread sheet‚ the thin slab project
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now. On the other hand‚ if the project being takes this year suffers from lose: firm might unable to take the second project one year from now. NPV method: There are few methods‚ which can be used to evaluate the iPhone project. Net present value method is one of the most prevailing methods to calculate and evaluate the project’s cash flow. The NPV of a project is the sum of the present values of all cash flow being generated under the condition of firm
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1. Calculate the Payback Period of each project. Explain what argument Tim should make to show that the Payback Period is not appropriate in this case. Answer : Year Synthetic Resin Epoxy Resin Cash Flows Cumulative Cash Flows Cash Flows Cumulative Cash Flows 0 -$1‚000‚000 -$1‚000‚000 -$800‚000 -$800‚000 1 $350‚000 -$650‚000 $600‚000 -$200‚000 2 $400‚000 -$250‚000 $400‚000 $200‚000 3 $500‚000 $250‚000 $300‚000 $500‚000 4 $650‚000 $900‚000 $200‚000 $700‚000 5 $700‚000 $1‚600‚000 $200‚000
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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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Net Present Value (NPV) Net present value is the present value of net cash inflows generated by a project including salvage value‚ if any‚ less the initial investment on the project. It is one of the most reliable measures used in capital budgeting because it accounts for time value of money by using discounted cash inflows. Before calculating NPV‚ a target rate of return is set which is used to discount the net cash inflows from a project. Net cash inflow equals total cash inflow during
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Evaluate the proposal In order to evaluate the aircraft proposal we need to calculate the NPV and IRR of both the Aircraft purchasing and leasing option. Investment decisions determine the future cash flows of a company and expected future cash flows determine the value of a company. In order to calculate the NPV we first needed to get a cost of capital. We calculated the Weighted Average Cost of Capital in order to measure the firm’s cost of capital. When calculating the WACC for the Aircraft
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