Report on Capital Budgeting Abstract This report deals with • The nature of capital investment appraisal • The techniques available for evaluating capital investments • The limitations of these techniques • The capital budgeting practices in select countries Introduction: Some of the major responsibilities of top management are in the area of long range planning. Allocating resources to competing uses is one of the most important decisions a manager has to make. Executives are constantly
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modified internal rate of return for the new strip mine. Based on these calculations‚ it will be determined whether Bethesda should take the contract and open the mine or pursue other opportunities. The Payback Period The payback period method calculates the time it takes for a project to “pay back” its initial investment. The period is usually reflected in terms of number of years. Management sets the minimum acceptance criteria for how long it feels appropriate for the project to take before it
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of Finance Notes Theory Questions Explain why the NPV approach is preferred to the IRR approach (2006) The NPV approach takes into account the timing of cash flows and the IRR does not. For example if you took 2 projects that required the same initial outlay and had the same cash inflows for the same period of time but one project was deferred for one year‚ using the NPV we would have different values but the IRR would give us the same. The NPV approach takes into account the scale of the project
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is involved in (pure play companies) and use their required rate of return. 4. Using Pamela’s methodology of adjusting the firm’s hurdle rate based on the relative variable of each division’s sales in relation to that of the consolidated firm‚ calculate the divisional hurdle rates. 13.86 11.11 11.40 12.48 WACC(defence products) = 12.48% * 1.11 = 13.86 5. Comment on this methodology of estimating the divisional hurdle rates. Do you agree with it or not? Explain your
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project has initial costs of $575‚000 and annual cash inflows of $102‚000 per year for 10 years. Which firm(s)‚ if either‚ should accept the project? Gold metals should accept the project (because net NPV > 0) Delve Mining should decline the project (because net NPV < 0) SEE ATTACHED SPREADSHEET FO COMPLETE CALCULATION 4. (10) In an M&M world with NO TAXES (perfect capital markets)‚ Dozer Inc. is a no growth firm and pays out all of its earnings as dividends.
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hand is to know whether it would be more advantageous for United Metals to produce the components itself or to directly buy them from one of its suppliers‚ Amalgamated Components. In order to arbitrage between the “make” and “buy” decision we will calculate the Net Present Value of both these options. In order to do so we will first compute the annual cash flows that would result from one or the other option. First of all‚ we have some information useful for both of the projects: * This is
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Flash memory Flash memory was founded in late 1990s. The small firm specialized in designing and manufacturing solid state drives and memory modules. Given the facts that products had short life cycles‚ and technologies changed frequently in the market‚ the competition was intensive in the industry and product profit margin was low. In order to stay ahead of competition‚ Flash memory needed to highly invest in R&D to create cutting-edge products so that customer’s wants and needs could be met.
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New Economy Transport (A) p. 182The New Economy Transport Company (NETCO) was formed in 1955 to carry cargo and passengers between ports in the Pacific Northwest and Alaska. By 2008 its fleet had grown to four vessels‚ including a small dry-cargo vessel‚ the Vital Spark. The Vital Spark is 25 years old and badly in need of an overhaul. Peter Handy‚ the finance director‚ has just been presented with a proposal that would require the following expenditures: Mr. Handy believes that all
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Chapter 12 Analyzing Project Cash Flows 12-1. Captain’s Cereal’s new Crunch Stuff n’ Stars is expected to generate $25M in sales. However‚ 20% of that will be cannibalized from the original cereal‚ Crunch Stuff. Thus‚ the sales amount that should be allocated to the new Stars version is only (100% − 20%) of the $25M‚ or $20M. This is an example of finding an “incremental” cash flow. As shown in equation 12-1‚ we only want to consider what is different if we go ahead with the project: incremental
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indicator that buying the vessels is not a good idea. The tax rate of 35% makes a lot of difference in determining this NPV. In our calculations we did assume a tax rate on the final sale of the vessel. If it were possible‚ or known‚ the tax rate on the salvage it might be more feasible to buy the vessel‚ and end up with a positive NPV. The effect of taxes on EBIT and thereby NPV is easily seen in our analysis numbers. As taxes remain steady and profits from operations falls‚ the prudence of the investment
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