FIN 470 Exam 1 NAME________________________ 1. What are the three types of financial management decisions? For each type of decision‚ give an example of a business transaction that would be relevant. Capital budgeting (deciding whether to expand a manufacturing plant)‚ capital structure (deciding whether to issue new equity and use the proceeds to retire outstanding debt)‚ and working capital management (modifying the firm’s credit collection policy with its customers).
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Capital budgeting report Capital Budgeting Report Introduction At present the boat Cynthia II no longer has economic value for NETCO meaning that either an overhaul of said boat has to be financed or a new boat should be purchased. Therefore‚ an NPV budget decision has to be computed in order to determine which alternative‚ an overhaul of the current boat or the purchase of a new one‚ is most profitable. To compare the profitability of these two options we used the difference between the present
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which are likely software upgrades that are notorious for running over time and over budget. Management should therefore run multiple scenarios based on potential cost and time overrun scenarios to assess under which circumstances the project stays NPV positive. Advertising campaigns are less likely to cause surprises on the investment side since they can be limited to a certain budget‚ but their success is very hard to predict. Even if the agency that Ameritrade ultimately selects can more or
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project A has an expected lifetime of 7 years‚ and project B has an expected lifetime of 11 years it would be improper to simply compare the net present values (NPVs) of the two projects‚ unless neither project could be repeated. EAC is calculated by dividing the NPV of a project by the present value of an annuity factor. Equivalently‚ the NPV of the project may be multiplied by the loan repayment factor. EAC= The use of the EAC method implies that the project will be replaced by an identical
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present value In finance‚ the net present value (NPV) or net present worth (NPW) of a time series of cash flows‚ both incoming and outgoing‚ is defined as the sum of the present values (PVs) of the individual cash flows. In case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price‚ the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF)
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The methods that a firm can use to evaluate a potential investment: 1) ‘Discounting’ Methods: Net Present Value (NPV): the present value of the future after-tax cash flow minus the investment outlay made initially. The decision rule for the NPV as follows: invest if NPV> 0‚ do not invest if NPV< 0 Internal Rate of Return (IRR): calculates the interest rate that equates the present value of the future after-tax cash flows equal that investment outlay; then compared to the required
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Fonderia di Torino S.p.A. 1. Please assess the economic benefits of acquiring the Vulcan Mold-Maker machine. What is the initial outlay? What are the benefits over time? What is an appropriate discount rate? Does the net present value(NPV) warrant the investment in the machine? Initial Case Outlay Price of new machine (1‚010‚000) Current after-tax market value of old machine [130‚000+{(415‚807-130‚682) -130‚000}*0.43]= 196‚704 Net outlay for new machine -1‚010‚000+196‚704 = -813‚296 Appropriate
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CHAPTER 29 Capital Budgeting Meaning The term Capital Budgeting refers to the long-term planning for proposed capital outlays or expenditure for the purpose of maximizing return on investments. The capital expenditure may be : (1) Cost of mechanization‚ automation and replacement. (2) Cost of acquisition of fixed assets. e.g.‚ land‚ building and machinery etc. (3) Investment on research and development. (4) Cost of development and expansion of existing and new projects. DEFINITION OF CAPITAL
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cost of a project is $100‚000. Sales are for five years‚ starting next year. The company earns $0.50 per sale‚ and expects to sell 60‚000 units per year. If the interest rate is 5%‚ the NPV is -100‚000 +129‚884 = 29‚884. At what level of sales does the project break even in terms of NPV? Set PV = -100‚000 (so that NPV = 0) and find the amount of sales per year. The answer is sales in dollars = 23‚097 so that sales in units = 46‚194. Break-even analysis is a good starting point‚ but it ignores some
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SEMINAR 4: FRIDAY 7th NOVEMBER 2014 ASSET PRICING Seminar Questions to be completed before class 1. Explain‚ using examples the difference between systematic risk and unsystematic risk. 2. Why is it useful to calculate returns on assets using either a one-factor model such as‚ CAPM or a multi-factor model such as‚ APT? 3. Answer questions 8 and 10 on page 316 of the Hillier et al. (2013) text. 4. Multifactor Model The monthly return on an asset‚ Rs is determined by the following equation: Rs = 0
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