CHAPTER 6‚ Case #1 BETHESDA MINING To analyze this project‚ we must calculate the incremental cash flows generated by the project. Since net working capital is built up ahead of sales‚ the initial cash flow depends in part on this cash outflow. So‚ we will begin by calculating sales. Each year‚ the company will sell 500‚000 tons under contract‚ and the rest on the spot market. The total sales revenue is the price per ton under contract times 500‚000 tons‚ plus the spot market sales times the
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Quantitative Business Methods Problem 1. A client invests $500‚000 in a bond fund project to earn 7% annually. Estimate the value of this investment after 10 years. Solution FVN = PV(1+r)N Here we have FV10= 500‚000 (1+0‚07)10 = 983 575‚68 Problem 2. For liquidity purposes a client keeps $100‚000 in a bank account. The bank quotes a stated annual interest rate of 7%. How much will your client have in this account at the end a. One year b. Two years Assuming no withdrawals (so all the
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Theory of Finance Exam Review Taught by: Tana Chasakara tchasaka@uoguelph.ca http://guelph.soscampus.com/ Feedback from Last session • I move to fast through the material • I will slow down this time and go over 2 hours if necessary • I should correspond with Prof Bower more • Met with Professor Bower and created my slides based on the information she provided • Some one on one time would be really helpful • I will be in the library tomorrow from 12.30-3.30 if
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into an equity joint venture in the city of Changchun.This proposal would be one of the first two green field equity joint venture with PepsiCo having control over both the board and day-today managmenet. PepsiCo uses capital budgeting tools such as NPV and IRR to systematically evaluate their investment project. Using this evaluation method Mr Hawaux‚ vice president of Finance for PepsiCo East Asia‚ was wondering whether this project would be profitable and if PepsiCo should proceed with the Changchun
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Corporate Finance Professor H. Wang Problem Set #1 1. Calculate the present value of the following cash flows discounted at 10 percent: a. $1‚000 received seven years from today. b. $2‚000 received one year from today. c. $500 received eight years from today. 2. A firm has an estimated pension liability of $1.5 million due 27 years from today. If the firm can invest in a risk free security that has a stated annual interest payment of 8 percent‚ how much must the firm invest today to
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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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price their instruments lower than competitors‚ giving them a competitive advantage in the market. In today’s highly competitive markets‚ any advantage you can obtain over the competition should be exploited. Before looking over the calculations of NPV‚ IRR‚ and Payback
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Year 4 $ 155‚000 $ 145‚000 A) Neither proposal would add value. B) Choose Proposal A because it has the highest IRR. C) Choose Proposal A because it has the highest NPV. D) Choose Proposal B because it has the highest IRR. E) Choose Proposal B because it has the highest NPV. Answer: A [NPV for A: $(2‚548); NPV for B: $(3‚892)] 2. You’re evaluating a proposed business project and you want to know what is the Internal Rate of Return. Based on the following estimated Free Cash Flows
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Telus: The Cost of Capital Telus needs to calculate the cost of capital from the variety of data given. The cost of capital is determined mostly by how the funds are used rather than where they were obtained from. It relies on the risk of investments Telus involves in‚ therefore‚ depending on cost of both equity of debt as described below. Also note that‚ even though the preferred shares are not attractive to issuers and may not get issued again‚ it is still on the company’s balance sheet and affect
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profit concept thus expose the weakness of profit maximization. O It doesn’t consider the time value of money or NPV of cash inflow. O It fails to consider the fluctuation of profit. O Despite this lacuna‚ Profit does matter for any kind of business. Ensuring continual profit ensures maximization of the shareholder’s wealth. Wealth Maximization: It is also known as value maximization or NPV maximization. This is possible only when‚ the firm pursues policies which would add the market value of the
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