( Answers to Mini-Case Questions BioCom Inc. This mini-case provides a review of the methodology and rationale associated with the various capital budgeting evaluation methods such as payback period‚ discounted payback period‚ NPV‚ IRR‚ MIRR‚ and PI. 1. Compute the payback period for each project. |Time of Cash Flow |Nano Test Tubes |Microsurgery Kit | |Investment |−$11‚000.00 |−$11‚000.00
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Evaluate the strengths and weaknesses of the Cash Payback Period‚ Discounted Cash Payback Period‚ NPV‚ IRR and MIRR capital expenditure budgeting methods. Prepare a recommendation for Stewart regarding the capital budgeting method or methods to use in evaluating the expansion alternatives. Support your answer. Capital budgeting techniques such as payback period‚ net present value (NPV)‚ internal rate of return (IRR) and modified internal rate of return (MIRR) all offer particular strengths and weaknesses
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it payback period is less than the 4 year maximum payback period 3.65years < 4 years ---------------------------------------- PART B: NPV &IRR LATHE A NPV & IRR years 0 1 2 3 4 5 cash flow (660‚000) 128‚000 182‚000 166‚000 168‚000 450‚000 cash flows (360‚000) 88‚000 120‚000 96‚000 86‚000 207‚000 LATHE B NPV & IRR PV Factor @13% 1 0.885 0.783 0.693 0.613 0.543 PV Factor @13% 1 0.885 0.783 0.693 0.613 0.543 PV (660‚000) 113‚274 142‚533
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Calculating Returns Suppose a stock had an initial price of $92 per share‚ paid a dividend of $1.45 per share during the year‚ and had an ending share price of $104. Compute the percentage total return. The return of any asset is the increase in price‚ plus any dividends or cash flows‚ all divided by the initial price. The return of this stock is: R = [($104 – 92) + 1.45] / $92 R = 0.1462 or 14.62% Calculating Returns Rework the problem above‚ but this time assuming the ending
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considered before accepting any project If the project is Technically Feasible‚ Commercially Viable‚ Financially viable. For evaluation of Financial Viability‚ we need to employ any of the following methods: 1. Net Present Value (NPV) 2. Internal Rate of Return (IRR) 3. Profitability Index (PI) Investment decisions are generally called capital budgeting decisions. One of the main important concepts in analyzing investment is the concept of time value of. The value of a present amount in the
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Computation of the NPV : NPV= -35‚000 + Σ 5‚000 / ( 1 + 12%)^ 15 i=1 NPV = $- 945. 67 Computation of the IRR : 0= -35‚000 + Σ 5‚000 / ( 1 + IRR)^ 15 i=12 IRR= 11.49% The NPV of this project is negative and the IRR is lower then the Cost of Capital (12%) Rainbow products shouldn’t go for it. (B) Based on the perpetuity formula we can compute the PV in this case : Computation of the PV : PV= Cash flow per year/ cost of capital) =4‚500 / 0.12 = $37‚500 Computation of the NPV : NPV= -Initial investment
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Hospital is considering an expansion project that would utilize land previously purchased. By expanding into ambulatory surgical services‚ the hospital has the opportunity to increase revenues and capture market share in this area. Investigation in the NPV of the project and a scenario analysis reveal that the project would be profitable. Debt Financing This project will most likely involve debt financing. This means that interest expense would occur and should be taken into account in the analysis
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budgeting tools that financial managers and analysts use to evaluate the merits of an investment. Some of these techniques are quite intuitive and simple to use‚ such as payback analysis. Other techniques are a little more complex‚ such as the NPV and IRR approaches. In general‚ the more complex techniques provide more comprehensive evaluations‚ however‚ the simpler approaches often lead to the same value-maximizing decisions. Chapter 11 illustrates how to develop the capital budgeting cash flows
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using net present value (NPV) and internal rate of return (IRR). Joint Ventures in China • Before 1993‚ – “cooperative joint venture”(CJV): the amount of capital injected in to the business did not necessarily equal the amount of profit-sharing • After 1993: • “Equity joint venture”: The profit would be distributed in line with the ratio of capital injected (Pepsico 57.5%; The Second Food Factory Changchun:37.5%‚ Beijing Chong Yin Industrial & Trading Company:5%) NPV • How much value is created
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the NPV of remodeling your hotel? Equivalent Annual Annuities (cont.) What is the NPV of rebuilding your hotel? 50‚000 50‚000 50‚000 50‚000 50‚000 NPV= −100‚000 + + + + + 1.10 1.102 1.103 1.10 4 1.105 = 89‚550 What is the IRR of remodeling your hotel? NPV= −300‚000 + = 105‚570 66‚000 66‚000 66‚000 66‚000 + + + ...+ 1.10 1.10 2 1.103 1.1010 What is the IRR of rebuilding your hotel? 100‚000 = 50‚000 50‚000 50‚000 50‚000 50‚000 + + + + (1+ IRR) (1+ IRR) 2 (1+ IRR) 3 (1+ IRR) 4
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